USDA's Quarterly Hogs and Pigs report, released Friday afternoon, Sept. 28, indicates that any hopes of a quick return to profitability for U.S. pork producers is unlikely. The report's key numbers (shown in Table 1) were generally significantly larger than last year and, with only one exception, larger than the average of the pre-report estimates of industry analysts. And, in my opinion, these numbers may be low. They generally confirm my long-held and oft-stated suspicion that U.S. productivity is again on the upswing, largely due to the effectiveness of circovirus vaccines.
The highlights of the report:
- The U.S. breeding herd continues to grow at a rather modest pace. Sept. 1 breeding inventories were 1.1% higher than last year. That's a bit faster than in recent quarters, but not rapid expansion by any stretch. Still, 66,000 new sows at 23 pigs/litter will add 1.5% to next year's slaughter.
- The two "reasonableness" tests are okay, but both to the low side. The 180 lb. and over inventories were pegged at +3.4%, while September slaughter, after adjustment for one less slaughter day and 30,000 more Canadian market hogs this year, is up 3.7%. Pretty close. A bit more concerning is the comparison of the published June-August pig crop to the inventory of pigs weighing less than 60 lb. The pig crop was shown as 3.5% larger while the under-60 lb. inventories were listed as only 2.9% larger. After adjusting for 22,000 more Canadian feeder pigs imported in the June-August time period, the U.S.-only number is +2.8%.
- That June-August pig crop means that Q4-07 supplies are not our only worries. Large supplies will continue into Q1-08 and likely extend losses well into next year.
- The report's market hog inventories indicate that Q4 federally inspected (FI) slaughter will be near 28.5 million head and commercial slaughter will be roughly 29 million head. University of Missouri Professor Glenn Grimes predicts that number will be over 29 million head, including 10 million head in October. Given the fact that September slaughter has exceeded what the report suggests, I would have to agree with Professor Grimes and add some to the report's numbers for the fourth quarter. I certainly don't think 29 million and change is out of the question.
- I don't believe the farrowing intention numbers for the fall quarter and I think the spring quarter numbers may be low. To have 1.1% more breeding animals and then only farrow 0.5% more litters doesn't add up. Even the +1.3% for Q1-08 may be low if what I am hearing about circovirus vaccines' impact on sow productivity is true. That information is based on a very small sample and may also indicate improvement from very low levels, but we may get more and larger litters than we expect.
Figure 1 shows historical FI weekly hog slaughter and the levels of weekly hog slaughter indicated by the inventory numbers from this report. I strictly use the report numbers in order to provide a clear baseline. Given the past three weeks' year-over-year comparisons of +4.4%, +4.8% and +3.9%, I would add 1 to 2% to the report numbers and that would push several weeks' slaughter totals to 2.3 million head and slightly beyond.
The sum of this means that producers are going to see red ink for the first prolonged period since 2003. Breakeven costs in the upper $40s on a liveweight basis and mid-$60s on a carcass weight basis just do not mix with carcass prices below $60 -- and I believe that is what we are looking at for Q4-07 and Q1-08. My calculations show Q2-08 prices of around $70/cwt. carcass and Q3-08 prices in the upper $60s.
Chicago Mercantile Exchange (CME) Lean Hogs futures contracts are still priced above those levels. Some pricing and risk management opportunities may still be available, even after the sell-off of recent weeks. Consider any moves you make carefully vs. your feed-cost situation.
Any Bright Spots?
What could change this gloomy outlook? It is obvious that any help must come from the demand side. A boost in exports would be the quickest and most likely way of stimulating demand and that certainly could happen with China's obvious need for pork; 1.3 billion times any number is a very big number! But, at the moment, these decisions are apparently driven by politics not economics, so forecasting their course over the next few months is difficult.
Lower hog prices and lower ham prices could also improve this year's lagging exports to Mexico. Those lower ham prices likely will only come after holiday ham needs are met in early December. Still, any improvement will be helpful.
The downside for pork demand will likely be chicken prices. Higher broiler output has reportedly already begun to push chicken prices downward and that will be a drag on pork demand. Many retailers are already lined up to feature pork in October, but keeping that featuring activity through the fall may be difficult if chicken prices drop -- and I think that is a certainty. The question will be the degree of the decline.
Click to view graph.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.