Statistics Canada's January 1 count of pigs on Canadian farms was, at least to me, quite disappointing. At a time when large supplies are still weighing heavily on the U.S. market, imports of Canadian pigs are at record levels and losses for Canadian producers are, by all accounts, huge. Apparently, Canadian producers simply have refused to liquidate to any substantial degree as of the first of the year.
There are many indications that the liquidation in Canada has sped up over the last few weeks, but this snapshot paints a picture for very large hog supplies to continue through most of 2008. With costs still rising and no substantial reductions, at least in the hard, dependable data we have to date on either side of the border, I fear Purdue Agricultural Economist Chris Hurt's prediction that this could be the worst year for pork producers in history may actually come true. If so, I'll issue my mia culpa's to Dr. Hurt the first time I see him.
Consider the following from today's report:
- Canada's breeding herd numbered 1.549 million head on Jan. 1, just 1.9% smaller than one year ago. Combined with a Dec. 1 U.S. breeding herd of 6.157 million head (1.1% larger than one year ago), this leaves the Can-Am breeding herd 0.5% larger than last year (Figure 1). I would not have expected U.S. producers to have cut back by now because they only started incurring losses in September. But Canadian producers have been losing money for more than a year, and yet the herd was reduced by only 2%.
- Canada's market herd was pegged at 12.461 million head, 6.5% lower than last year. All of that reduction was in pigs weighing over 44 lb. (20 kg), reflecting the higher shipments of weaner and feeder pigs to the United States. The supply of pigs weighing 44 lb. or less on Jan. 1 was less than 1% smaller.
- Canada's Q4-07 pig crop is only 0.3% lower than it was in the fourth quarter of 2006. That this number is smaller than the breeding herd reduction is no surprise as no one culls their best sows, so we would expect productivity to increase. Combining that number with a Q4 U.S. pig crop that is 4.3% larger, though, means that the Can-Am crop is still over 3% larger than last year, suggesting significantly larger slaughter runs in Q2-08 (Figure 2).
- Canada's Q4-07 farrowings were 1.5% lower than one year ago. That is reasonably in line with the reduction of the breeding herd and lags the reduction a bit per normal. The concerning numbers, though, are farrowing intentions for the next two quarters, which are 0.2% and 0.4% lower than last year. Put those with U.S. intentions for the first two quarters and we still expect Can-Am farrowings to be 1.8% higher in Q1 and even with Q2-07 (Figure 3). If that many litters are farrowed in Q2 and survival rates remain as high as they were in the second half of 2007 -- and why wouldn't they be if producers could still get enough circovirus vaccine -- it means Q4-08 slaughter will be even with Q4-07. Do you really think we can dodge another fourth quarter of 9.055 billion pounds? Will China and exceptional domestic movement still be there to bail us out?
With all that said, sow slaughter has increased in recent weeks. The movement of sows from Canada to the United States has not shown up in the data, but I've heard the USDA is revising those data. My suspicions that some cull breeding animals were being counted as market hogs appears to be correct. How big the revisions will be is still unknown, but I believe they will provide us with a more accurate picture of the current situation. I just hope it jibes well with recent Canadian and U.S. sow slaughter data and, perhaps, suggests a larger, more rapid reduction of production capacity. Look for more on this subject next week.
Time to Play Defense
On a day when the supply news left me disappointed with the pace of reductions, though, Chicago Mercantile Exchange (CME) Group Lean Hogs futures were up across the board, with the deferred contracts going up the most. These Lean Hogs futures should have been the most negatively impacted by the slow rate of reductions in Canada.
There is a longstanding and strong seasonal tendency for hog futures to rise with the temperature in the spring. Today's price change suggests that that historical trend may yet win out in spite of higher-than-hoped-for inventory estimates and the sell-off of the past 10 sessions. Higher feed prices will indeed drive up hog prices in the long run, but the futures markets seem to bid them in immediately these days. That doesn't agree with my economist's school lessons, by the way.
I am more convinced than ever that producers should adopt a defensive mindset for 2008. I believe that the chances are slim that you can accept all of the risk of cash markets and end this year ahead of where you are now. Study your situation carefully and consider the value of breakeven or small losses versus the potential for large losses.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.