The USDA's Hogs and Pigs Report came in close to trade estimates. The breeding herd at 94% of a year earlier was some below the average of the trade estimates but above our estimate based on gilt and sow slaughter. We still believe there is a realistic possibility that the breeding herd is below the USDA estimate.

The market inventory at year-earlier levels was at our expectation. Slaughter for the first four weeks ending in March was up about 2.4% - a little less than the 180 lb. and heavier market weight inventory indicated, but well within the potential sample error.

The heavier weight market inventories indicate a second quarter 1999 slaughter about 1% larger than a year earlier. With this slaughter level, prices are expected to be in the mid-$30s for the April, May and June average. The lighter weight market inventories point to a slaughter level in the third quarter about 2% less than 12 months earlier. This slaughter level is still quite large and will likely hold prices in the mid- to upper-$30s for July, August and September.

Cold storage pork stocks at 117% of a year earlier at the end of February will continue to be a negative for stronger prices at least through spring.

Average weights of hogs continue to run at record high levels (carcass weights at 191 lb. in February) and are contributing to the large supplies of pork.

January pork exports were up a short 4% in product weight. Our sales to the Russia Federation were down 87% from a year earlier and to Canada down 43%. The good news is that exports to South Korea were up over 800% and to Taiwan were up over 1,800%. Our largest customer, Japan, showed a 7% increase from a year earlier during January. The second largest customer for U.S. pork, Mexico, showed an 11% gain in purchases from 12 months earlier.

In recent hog cycles, reduction in hog slaughter is yielding a bigger price jump than in the past. For example, for the three productivity cycles between 1974 and 1986, the average production decline in the big year of reduction for each cycle was 10.6% and the average deflated price increase was 19.7%. For the last three production cycles ending in 1996, the average decline in production was 2.7% for the big year of reduction in each cycle and the average price increase was 15.8% in deflated prices.

If the price flexibility of the last three production cycles holds for the current cycle, hog prices in the year 2000 are likely to be higher than most people forecast if production is down as much as now seems likely.

Has the change in the structure of the production segment of the industry contributed to the smaller reduction in production for the big reduction year in the cycle? Our opinion is yes. But, the decrease was also, probably, moderated by the substantial increases in pork exports during this period.

During the 10-year period ending in 1996, the U.S. domestic supply of pork was reduced about 1% each year by larger exports and smaller imports. With this happening along with population growth in the U.S., the supply-demand conditions at the live hog level improved rapidly. During the first three production cycles discussed above, the demand for pork was declining rapidly for much of the period.

Farrowing intentions for both the second and third quarters are for a 7% decline from the same period last year. If these intentions are carried out, the odds are high for prices in both the fourth quarter of 1999 and the first quarter of 2000 to be well above year-earlier levels but still in the $30s with some possibility of $40 or a little better. The bottom line is that pork producers will lose a lot more equity this year.