Near-term increases appear modest, but farrowing intentions cause some concern. The December Hogs & Pigs Report came in very close to the trade estimates and our expectations. The total herd on Dec. 1 was up 1%, the breeding herd was up 1% and the market herd was up 1%.
September-November farrowings were up 1%. December-February farrowing intentions logged in at a 4% increase, and March-May farrowing intentions are for a 1% increase over a year earlier.
The March-May farrowing intentions, if they turn out to be correct, are the good news in the report. However, we are viewing only a 1% increase with skepticism. We are hoping the intentions become reality because it would likely, then, result in a fourth quarter 2001 slaughter that is only up about 4% from the third quarter slaughter.
For the period between 1996-2000, fourth quarter slaughter has averaged 8% larger than the third quarter. In 2000, the fourth quarter was 6.8% more than the third quarter.
If the futures market believes the farrowing intentions for the second quarter and trades the October and December 2001 contracts accordingly, some pricing opportunities for that period likely will be very desirable.
The breeding herd estimate is quite consistent with our gilt and sow slaughter balance sheet estimate. The farrowing intentions of 104% for December-February continues to show productivity growth, but March-May farrowing intentions do not show any productivity growth from a year earlier - another reason for viewing the second quarter farrowing intentions with skepticism.
Demand for pork at the consumer level for much of 2000 has been close to 1999 levels. However, demand for live hogs has shown sharp growth in 2000. Live hog prices at the terminal markets were about 35% higher in 2000. And, 51-52% lean hogs, U.S. basis, were up 31-32% for this time period.
Even with an elasticity of -0.3 at the live level, this is a demand growth of 6-7% for 2000 compared to 1999. With an elasticity of -0.5 at the live level - the elasticity that worked very well for many years before the 1990s - this year's results would suggest a demand growth of 12-13%. This adds evidence to the belief that live hog demand is considerably more inelastic than it was until the late 1980s or early '90s.
If the second quarter pig crop is up only about 2%, as suggested by the second quarter farrowing intentions, and we do not lose a hog slaughter plant between now and then, slaughter capacity will likely be adequate for the fourth quarter 2001 slaughter.
The current information would suggest a terminal market price between $37-$40/cwt. and a 51-52% lean live hog price of $39-$42 for 2001. A corn crop greater than 9.5 billion bushels in 2001 would continue to provide the incentive for some producers to increase their herd size.
The past seven weeks of gilt slaughter data indicate producers may be in a holding pattern with their breeding herds. We hope this continues through 2001. However, average hog prices of $39-$42 at terminal markets or $41-$44 for 51-52% lean hogs, U.S. basis, for the first nine months of 2001 may push the industry back into an expansion mode.