The USDA Hogs and Pigs report, released Dec. 29, came in more bullish than many had expected.

The USDA's estimate of the breeding herd size as of Dec. 1, a little less than 96% of a year earlier, was more than 1.5% below the average of the trade's pre-report estimates.

The breeding herd at this size is consistent with our gilt and sow data, which showed a decline in the breeding herd during December. We believe the probabilities are high that the breeding herd on Jan. 1, 1999 will be down 5 or 6% from a year earlier.

The USDA did revise the Sept. 1 market herd, which is up from the estimate released in September. Slaughter during the fourth quarter was up between 9 and 10%. Around three percentage points of the 10 were due to larger gilt and sow slaughter, and live imports from Canada.

We believe the 9% increase in slaughter during December fits the heavier weight market inventories quite well when the larger sow and gilt slaughter and the larger live hog imports from Canada are considered.

Most people believe marketings were pulled forward during November and December due to the mild weather over much of the nation. If so, there is some chance that marketings during January and February may be a little below expectations, based on the report.

The market inventories indicate that first quarter slaughter may be about 6% below the fourth quarter of 1998. Slaughter at around 26 million head for this period should get marketings below slaughter capacity with modest Saturday kills. This factor alone will likely add substantially to the first quarter price, relative to the 1998 fourth quarter price.

Two factors that contributed substantially to the sharply lower prices in the fourth quarter, which were not present in the late '70s and '80s, were a more inelastic demand for live hogs and slaughter capacity less than the available hogs.

Certainly the 10% increase in number of hogs slaughtered was important, but it was only about one percentage point more than the average increase in the big growth year of the four cycles from 1978 to 1992. For those four cycles, prices were down an average of about 14%, with a 9% increase in slaughter, on average.

Granted, the inflation rate was quite high through much of this period and we were getting some of the inflation bid into pork prices. If we had the same elasticity for live hogs in 1998 that we had through the 1980s, and enough slaughter capacity to handle the hogs, we believe hog prices in 1998 would have averaged in the upper $30s or low $40s.

The industry will probably continue to be affected by these two factors if we produce 6-7% more hogs in the fourth quarter than any other quarter and we have 100 million hogs or more in the high production years of future cycles, unless we develop more slaughter capacity than currently seems likely.

If slaughter in the first quarter does drop as much as indicated by this report, prices for live hogs have a shot at the upper $20s with some chance at $30 for January-March.

We believe the odds are good for the March-May farrowings to be down as much as the indicated reduction in farrowing intentions of 7%.

We are a bit concerned with the under 60-lb. pigs in the market inventories on Dec. 1 being down 1%, while the September-November pig crop was up 2%. However, we do have reports from some producers that their production is down relative to a year earlier for this period.