The Hogs and Pigs report came in more bearish than the trade estimates and confirmed the industry's worst fears - more pigs in the production pipeline than expected.

The breeding herd was down 6%, the market herd down 2%, and the total herd down 3%. And, we believe there is a possibility that the breeding herd may be overestimated by USDA based on our gilt slaughter data.

We are killing ourselves with increased productivity both in numbers and weight. With a breeding herd down 6% - and possibly more - we only reduced the March-May farrowing by 3%. Hog slaughter for January-May was up 2.1%, but pork production was up 3.1%.

Total red meat production for January-May was up nearly 3% and broiler production was up 5.5% for the first five months of 1999. We are awash in meats with the total supply up 3.3% for January-May of 1999 compared to 12 months earlier.

We do not believe the change in structure of the production segment of the U.S. hog industry was a major factor in the record low hog prices of 1998. However, the change in structure is probably mostly responsible for the indicated continued low prices - below production costs for even the most efficient producers - now expected during 1999.

We will eventually reduce production of pork in the U.S. enough to give substantially stronger prices than in 1998 and 1999. However, these improved prices are not likely to occur quick enough to keep many producers - both large and small - from being forced to exit pork production as owner-operators.

We also believe the stressed financial conditions the production segment of the hog industry has experienced during the last two years of the 20th Century will contribute to more vertical integration. In other words, we're likely to see production and packing processes under the same ownership - as well as more vertical coordination with marketing contracts between producers and packers. The number of days left for independent, free-wheeling pork producers appears to be limited.

We do expect the reduction in the hog breeding herd to speed up but, unless we see some changes the industry doesn't appear to be positioned for, we will have burdensome supplies of pork for at least the remainder of 1999 and probably through most of the first half of 2000.

Total pork exports through the first four months of 1999 were off almost 12% in carcass weight equivalent pounds. However, the big reduction was in exports to Canada and the Russian Federation. Without these two countries in the mix, the January-April exports were up 17% from a year earlier.

Japan, our largest pork customer, bought about 9% more this year than last for the first four months of the year. The Republic of Korea showed a 365% gain for the above period, and Taiwan went from 155 tons to 9,504 tons and was our fourth-largest customer for pork for the first four months of 1999.

Of the 17 states with individual estimates of the breeding herd size, only Oklahoma and Pennsylvania showed gains and they were up 19% and 4%, respectively, from 12 months earlier. Of these 17 states, those with their breeding herds down 10% or more were Illinois, 21%; Indiana, 13%; Kansas, 16%; and Wisconsin, 20%.

The other states with a bigger decline in breeding herd size than the average were Iowa, 8%; Michigan, 8%; Ohio, 9%; and South Dakota, 7%. The Cornbelt states on average were down just short of 10%.

The demand for pork at the consumer level for January-April of 1999 shows a gain of between 1% and 2%. Our demand index shows pork demand at the consumer level working on the fourth consecutive year with a gain.

The market inventory shows the third quarter slaughter down about 1% and fourth quarter slaughter down 4-5%. This level of slaughter indicates 1999 hog slaughter will be above 100 million head, down less than 1% from 1998. With large cold storage stocks, larger imports, smaller exports and wide marketing margins, the average price for hogs in 1999 is likely to be below 1998.

Our slaughter estimates and prices for the next nine months are in Table 2.