While USDA's December Hogs and Pigs Report indicates very modest growth (0.7% or 42,000 head) in the U.S. sow herd, I keep hearing from people "on the ground" that a significant (or at least "non-trivial," in economics parlance) expansion is underway.

This information comes from the people selling breeding stock, buildings and services directly to the individuals and companies making the buying decisions. I tend to put more stock in the accuracy of those direct-contact reports, while admitting that they may not represent complete coverage of the industry.

Several of these people have lists that show 150,000 to 170,000 new sows and the names of the individuals/companies putting them in. It's pretty hard to argue when they can name names and tell you exactly where they are located. And, the remarkable thing is, the lists are all pretty similar.

One factor that we have to keep in mind, though, is the rate at which these 150,000 to 170,000 new sows are going in. Nearly everyone I've talked to over the past few months has indicated that the expansion is moving much slower than planned. Permitting delays and higher building costs are the most frequently cited reasons. A few projects have been cancelled, but the consensus is that plenty remain in the works and that it is only a matter of time until the units get built.

Finishing Space Growing Too
Recent run-ups in weaned and feeder pig prices (see Figure 1) support the idea that robust growth in Corn Belt finishing capacity. We've heard of 1 to 2 million new spaces in Iowa alone. That's 2 to 4 million pigs/year! Those spaces will need to be filled by pigs from somewhere.

Those pigs did not come from Canada in late 2005, but the Canadian corn duties could put those pigs on the road soon. Data for the first week of 2006 (90,145 head, 8% lower than one year ago) are not alarming, but this situation warrants close observation.

Growth is not bad unless it is too large and/or too fast. This expansion could be pretty large by today's standards, but it could come slow enough so that it doesn't cause a huge train wreck -- perhaps just a prolonged, minor one. That doesn't sound too good either.

Tough Week at CME
To say that it has been a tough week for Chicago Mercantile Exchange (CME) Lean Hogs futures would be an understatement. Two limit-down days and another with significant losses have left February futures nearly $5 below last week's close. The early declines were blamed on fund selling and the roll of commodity index funds (most notably the Goldman-Sachs fund) out of February and into April.

Those factors were important, but a big negative for short-term price outlook is what is happening with chicken. News of bird flu infections in Eastern Europe has cast a negative pall over the chicken market. Even more important, it appears that eastern Europeans are shying away from chicken regardless of its source in much the same way that Asians did in 2005.

That is bad news for the U.S. chicken industry and it is showing up in product prices. Thursday's USDA Northeast Broiler/Fryer Parts Price report (http://www.ams.usda.gov/mnreports/AJ_PY046.txt) showed boneless/skinless breasts at $1.00/lb. and bulk leg quarters at $0.22-$0.23/lb. That is very cheap protein and, given the close substitute relationship between chicken and pork, a very negative situation for pork demand.

While deferred Lean Hogs futures are also lower this week, they haven't been impacted nearly as much as has the February contract. That is encouraging except for the fact that broiler egg sets continued to run 2-3% above 2004 levels during non-holiday weeks in November and December. Broiler companies have shown no signs of blinking, yet.

I have urged readers to lock in profits for 2006 marketings and continue to do so. The down-price years of 1994, 1998 and 2002 all saw some reasonable pricing opportunities early in the year. While not as good as last week at this time, there are still some profitable prices being offered. Evaluate them in terms of your costs and capital situation and at least make a conscious decision to not take action. Do not let inaction make the decision for you.




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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com