Will hog and pork supplies be large enough this fall to push cash hogs into the mid-$70s as Lean Hogs futures suggest? Let’s look at the numbers.
First, cash hog prices last fall were much higher than these levels. October-sold hogs averaged in the low-$90s (carcass); hogs sold in November and December brought prices in the low-$80s (Figure 1). Rolling prices down to $75 and $73, respectively, the futures prices for October and December, respectively, being sold this morning, would knock nearly 20% off of October 2012 hogs and about 15% off of hogs for the rest of 2012.
According to the USDA’s June Hogs and Pigs report, fall supplies should not be anywhere near large enough to cause that kind of reduction. In fact, it suggests that supplies should be 0.6% lower for Q3 and 2.2% higher in Q4. One reason for the Q4 level is that there is one more slaughter day in this year’s fourth quarter than there was last year, so adjusting for that factor would leave supplies about 0.7% higher on a per-day basis.
Weights have pushed supplies higher since late winter, but declined sharply as temperatures rose early this summer. They appear to be bottoming now, coming in at just over 200 lb., carcass, for the past four weeks. A seasonal upswing is a lock. The question is just how high weights will go. We think high feed costs and the need to save some feed ingredients might keep average weights down from last year’s record highs. I expect them to reach 206 lb. or so in November, shaving about 1% from Q4 production vs. last year.
What about gilts that had been kept for breeding, but now are hitting the slaughter market? Some speculate that this gilt movement could flood markets this fall. But let’s think about just how many potential replacement gilts may have been out there.
Gilts’ Impact on Slaughter Count
We usually replace about three million sows annually; 2.5 to 2.7 million are sent to slaughter and roughly 500,000 sows are lost to on-farm mortalities each year. That means 56,000 to 60,000 gilts, on average, move into the sow herd each week to maintain it. A bit of growth during the first half of 2012 would push those numbers slightly higher and an ongoing liquidation would move a chunk of them to market. But even if all of these gilts went to market, they would add just 2.7% to weekly slaughter totals. I don’t think more than one-third of the weekly gilt supply would be sold in an “expansion truncation” scenario. Put a short 1% onto fall hog numbers and 1% onto fall pork supply since the gilts will be heavy.
Adding in another 10,000 sows per week to slaughter numbers would add another 3 million pounds of carcass weight pork. That is 0.7% of last week’s total pork production. Further, 70,000 to 80,000 sows can be handled pretty easily by the nation’s sow slaughter plants if margins are good – and they will be good given the price of sows in recent weeks. Capacity should not be an issue.
So, add all of these up and it is hard to make a case for much more than 1.5% more pork this fall. If exports hold steady at the level of recent months, they will fall short of last year’s fall surge and perhaps leave 1.5% more of total U.S. production to be sold on the domestic market.
A total supply increase of 2.5 to 3.5% should drive prices lower by 5 to 10% vs. 15 to 20% that the futures markets now suggest.
Could demand be this soft? That is always possible, but I think it is unlikely given already higher chicken prices and the potential for higher beef prices before the year is over.
At least for now, I’ll stick with my forecasts of upper $80s for September and mid- to lower-$80s for Q4. I simply don’t see the troublesome supply scenario that many anticipate, and I believe demand will be strong enough to support prices in those ranges.