Friday’s quarterly Hogs and Pigs report from USDA contained few surprises, but may have mixed impacts. Figure 1 provides the key numbers in the report.

The June 1 breeding herd was estimated at 5.862 million head, 1% larger than last year and slightly larger than was expected, on average, by analysts surveyed by Dow Jones last week.  The increase could put some pressure on deferred contracts in Monday trading, but the next few weeks’ discussions will likely center on whether all of those animals will actually remain “kept for breeding” given the sharp increase in costs that we have seen since June 15. 

On that day, December corn futures closed at $5.04/bu.  They closed Friday at $6.34.  All is not lost, yet, but a break in the hot, dry conditions gripping much of the Corn Belt must come soon.  My model now shows losses, on average, of $2.94/head for the second half of 2012 and $5.27/head for all of 2013, based on Friday’s closing corn and soybean meal futures.  Those numbers will likely have a few expansion-minded producers thinking twice.

On the other hand, the market herd inventories suggest somewhat lower supplies this fall than did the USDA’s March report.  Recall that the March report projected hog numbers in the second half of this year to be 2.5% higher.  The quarterly distribution of those forecast numbers was a bit screwy (+0.3% in Q3 and +3.0% in Q4) due to different numbers of slaughter days in the quarters.  Looking at the June data, though, suggests that second half slaughter will be only 0.5% higher than last year. 

The smaller increase in slaughter, a likely reduction in average carcass weight growth due to higher feed costs, and apparently not testing our slaughter capacity constraint will all contribute to higher prices in the short run.  The expected year-on-year decline in exports (due to the big China/Hong Kong surge in the second half of 2011) will offset some of those positive forces by adding 1 to 1.5% to domestic availability.  

Our March forecast had the national net weighted average price across all pricing methods in the range of $82 and $86/cwt., carcass, this fall.  Those appeared a bit rich after this spring’s anemic and late price rally, but an increase in domestic availability of 2 to 2.5% would leave Q4 prices close to that range.  We still think $80-$83 is a realistic range for Q4 hogs.  Lean Hog (LH) futures will have to add another $2 or so to provide cash prices in that range.

The last point to make regarding Friday’s report is the apparent slowing of productivity growth.   There are two factors to consider: 

  • Average litter size was record high at 10.09 pigs/litter, but that number is only 0.6% higher than last year, a rate sharply lower than the 2% average over the past four years.   That 2% pace may have been unsustainable, but I suspect the 0.6% is not representative of the continuing uptrend either.
  • USDA continues to underestimate the number of litters that will be farrowed in the future.  March-May farrowings came in slightly higher than one year ago, after being estimated at 1% lower in both the December and March reports.   In addition, USDA added 120,000 litters to the June-August intentions.  Should that addition materialize, it means about 1.2 million more pigs are expected this summer and in the slaughter mix from December through February.  I would not be surprised to see actual June-August farrowings even higher when the next report is released on Sept. 28. This has been going on for a couple of years and may well be a function of the data provided by producers and not the data crunching at USDA.   Regardless of the reason, we believe the intentions are too low relative to the breeding herd in this report, as well.  That means more summer and fall litters and more pigs coming to market from December 2012 through May 2013.  Figure 2 includes a 1% increase for both June-August and September-November farrowings.

The summary of analysts’ slaughter and price forecasts will be included in Weekly Preview next week.

Appreciating Our Independence

Here’s wishing you happy and safe Independence Day celebrations this week.  Find time on Wednesday to read the Declaration of Independence.  Most of us recognize portions of the document, “When in the course of human events, it becomes necessary for one people to dissolve the political bands which have connected them . . .” and, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness . .”  But do you know much about the actions by the British Crown that drove a desperate action to declare independence and invite the wrath of the most powerful nation on earth?  You will fully appreciate it only by reading the entire text.

I believe you will feel the weight of this decision in its final line: “And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our lives, our fortunes and our sacred honor.”

It was a monumental decision in 1776, and it stands as a major turning point in world history.   Celebrate this week with pride.  You can download a copy of the Declaration of Independence at http://www.archives.gov/exhibits/charters/declaration_transcript.html.