The higher-than-expected slaughter numbers in the latest USDA Hogs and Pigs Report have raised renewed fears about potential problems with packing capacity.

Fall slaughter is now expected to be up about 3%, a bit higher than expected. And, the industry’s slaughter capacity is projected to be near maximum, says Chris Hurt, Purdue University Extension marketing specialist.

“There’s going to be a bit more pork in the marketplace this fall, and that’s just enough to tip the scales toward lower prices, especially given concerns about slaughter capacity.
Unfortunately, high costs will likely depress margins into the red this fall, where they may remain through 2008,” he says.

“Compounding the slaughter capacity issue this fall will be continuing record live hog imports from Canada. Canadian live imports are up 11% so far in 2007, composed of 19% more slaughter hogs and 6% more segregated early weaned pigs. Live imports from Canada will represent more than 9% of total U.S. slaughter this year, a new record.”

The USDA quarterly report indicates sow inventory rose about 1%, about 0.3% above expectations, and demonstrated how the pork industry has continued expansion despite dramatic increases in cost of production led by feed prices and other inputs.

“Growing export demand has enabled the industry to continue expanding in recent years, but that support is giving way this year,” Hurt says. From 2000 to 2006, growing pork exports required an average increase in U.S. production of 1.2%/year.

“So far in 2007, exports are down 3%. The industry continues to expand for the export market, which is weak, at least in 2007,” he comments.

Added pork supplies of 3% this fall and winter, and 2% next spring and summer, plus slower growth in export sales, means that retail pork supplies will be 1-2% larger.

Hurt projects lower hog prices this fall to average $44-47/cwt. live basis for 51-52% lean carcasses. Winter prices could average $45-48/cwt. Spring and summer prices should be much higher averaging in the very low $50s.

“Concerns have grown once more about feed prices in the upcoming year,” he says. “Using current futures prices for corn and soybean meal, and adjusting for the expected basis, costs of production are expected to be above hog prices for most of the next 12 months. Costs during this time period are estimated at $51.50/live cwt. and hog prices are forecast to be near $48.50.

“This means the industry may operate at a loss near $3/cwt. over the coming 12 months. The larger losses of about $4 would occur this fall and winter, while smaller losses of about $1 are expected next spring and summer,” he adds.