You've heard the old adage: "Be careful what you wish for!" Well, it came home to roost for me with yesterday's quarterly USDA Hogs and Pigs report. I've lamented how boring the past few reports have been -- no real surprises, no numbers that differed significantly from the previous year. I certainly can't make that complaint this time.
More Market Hogs than Expected
Figure 1 shows the key numbers from the report. Virtually every number is larger than was expected by DowJones' pre-report survey of market analysts, indicating that the report will likely be bearish for futures prices in Friday trading at the Chicago Mercantile Exchange (CME). Only the five numbers in boldface type differed from pre-report estimates by over 1%, but they all provided some key insights into 2008 supplies.
The market herd, at 58.953 million head, was 4.5% larger than one year ago, 1% larger than was expected. The key here is that only the under 60-lb. category was much larger (1.6%) than had been expected, meaning that slaughter from mid-April through early June could be larger.
The problem with those numbers, though, is that the 180-lb. and over category, while near the level expected by analysts, was apparently still far too low.
December federally inspected (FI) slaughter exceeded 2006 levels by 9.2%. That figure includes the same number of weekdays and Saturdays as one year ago, but one of those weekdays was Christmas Eve, which fell on a Sunday in 2006. There was some tradeoff of slaughter on this year's Christmas Eve (last Monday) with last Saturday's slaughter, so we can't just adjust Monday's total by adding the difference between its estimated 134,000 head and a "normal" Monday for this year.
Suffice it to say that market hog availability during December has been at least 10% larger than last year, while the USDA report says it should have been up 6.1%, plus any extra Canadian market hogs, which have added about 1% to weekly slaughter this fall. A discrepancy of roughly 3% is very large and makes us wonder whether the report's other numbers, most notably market herd inventories, may be low as well. It is a risk that cannot be ignored, although we have to use the report numbers for now.
Farrowing Intentions, Trends
The report also indicates that supplies should stay high through most, if not all, of 2008. Higher farrowings in the September-November (+2.7%) and December-February (+2.4) quarters and accelerated growth in the number of pigs saved per litter will add to supplies. September-November litter size averages set another record at 9.243 pigs/litter, breaking the previous record set in June-August of this year, at 9.236 pigs/litter. The 1.5% year-over-year growth rate is the highest since the June-August quarter of 1999 and continues a pattern of higher litter size growth that began last spring. While the evidence of the circovirus vaccines' impact on sow productivity is mixed, it appears that some factor has put sow output on a renewed upward trend.
Canada, Circovirus, etcetera
And then there is Canada. Imports of both feeder pigs and market hogs have surged in late 2007, while economic conditions have deteriorated to the point that significant sow liquidation are, I believe, eminent. So how do we account for more pigs coming south, but potentially fewer pigs available to come south?
My forecasts for weekly slaughter through 2008 appear in Figure 2. The forecasts include an upward adjustment for extra Canadian market hogs through Q2 and extra Canadian feeder pigs through Q3. They also include adjustments to account for the March 2007 surge in U.S. slaughter that I believe was caused by the initial introduction of circovirus vaccines in the fall of 2006.
The net result is projected 2008 commercial slaughter of 112.7 million head, 3.1% more than will be slaughtered this year. The annual growth results from quarterly increases of 3.5%, 4.8%, 3.3% and 1.1%. I am factoring in no growth of carcass weights in 2008 due to high feed costs, so these increases represent pork production growth as well.
And that brings us to demand. If we just decide to leave it the same as in 2007, one has to decide on which 2007 demand level to leave it at -- the poor demand of Q1, the robust demand of Q4, or somewhere in between?
I am settling on the last of those choices. Yes, it's a cop out, but it makes the most sense to me. Exports and domestic consumer-level demand have been outstanding this fall. I expect pork exports to continue to be strong given the weakness of the U.S. dollar against the currencies of our international competitors. Domestic consumer demand has recovered well, but lower beef prices and, I believe, inevitably lower chicken prices will both have a dampening impact. Should a recession develop in 2008, pork will fare better than the other species, but the indirect pressure exerted through lower foodservice demand (where beef and chicken are far more heavily exposed) will put pressure on consumer-level demand as well.
My quarterly and annual price forecasts, as well as those from three other noted analysts/groups, appear in Figure 3. My December forecasts for Q1 are roughly the same as those of September, while Q2 forecasts are about $3 lower and Q3 forecasts are $2 higher. Notable among this set of predictions are those of Professors Grimes and Plain at the University of Missouri, which are significantly lower than the others. They are predicting slightly higher supplies and somewhat softer demand in 2008.
Finally, and you've heard this many times before over the past two years, the futures markets are still well above the price levels we predict. In fact, CME Lean Hogs futures contracts are offering prices near breakeven levels even with today's high feed costs. Iowa State University agricultural economist John Lawrence pegs average production costs at $70/cwt., carcass weight, given $4/bu. corn and $300/ton soybean meal. Obviously, none of the forecasters expect much black ink in 2008.
While futures markets are higher than the predicted prices, don't get in a rush to sell. History says that December and early January is about the worst time of the year to sell hog futures. Rising spring cash prices usually lift futures prices.
Due to some holiday disruptions in data availability, our weekly Production and Price Tables cannot be completed this week. They will return in next week's edition.
With all the challenges it may bring, we wish you and yours a Happy New Year!
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.