The Canadian and U.S. pork industries will be primarily shaped by three factors, over the next 12-18 months. These factors, all of which are at unprecedented levels, include:
Remarkably strong live hog demand – The combination of hog quantity and price has never before been as high as it was in April and May.
Record-large supplies – Last week was just the second week of 2008 (the first being New Year’s week) in which U.S. FI hog slaughter was not record large for the respective week.
Record-high production costs – My production forecast for market hogs sold in June (based on production parameters from Iowa State University) is $78.66/cwt. carcass, the highest ever. But higher costs are coming.
Will these three factors change in the coming months? Increase? Remain near today’s levels? Decline? Those are huge questions upon which much of the future of the industry will ride. More important for your operation is “Do you have a plan to handle these three factors NO MATTER WHICH DIRECTION THEY MOVE?” Such a plan will not be easy but you should be thinking about each of them.
What can you do about hog demand? Producing hogs without quality and utilization defects (i.e., they must have high lean content, high quality lean and fat, have no drug residues, be within your packer’s preferred weight range, etc.) is the demand-enhancing item most clearly within your control. But beyond that, there isn’t much that you can explicitly do.
Today’s strong demand is still being reflected in high CME Group Lean Hogs futures relative to current cash prices and cash price forecasts that I think are justified by future supplies. So, even if you cannot do much to impact hog demand, you can take action to capture recent strength.
We will get another read on future supplies when USDA publishes its June Hogs and Pigs Report, and Statistics Canada publishes its July Hog Statistics report. Every indication from the respective March and April reports was for record-large slaughter in most of the remaining weeks of 2008 with fourth-quarter U.S. FI slaughter in excess of 30 million head.
The recent run-up of cutout values and hog prices accompanied smaller hog slaughter totals – relative to recent levels. But those totals were still roughly equal to the levels suggested by the March Hogs and Pigs Report. The weeks prior to that were 3.5% LARGER than suggested by the report. The rise in prices was impacted by smaller hog slaughter but not SMALL hog slaughter by any stretch of the imagination.
The key here will be to have hog marketings current when the fourth quarter arrives. If you are considering lower market weights, you must get them lower this summer. When September arrives, slaughter runs will be large enough that you will have no opportunity to move pigs quicker and bring weights down. You have about 3 months.
The production-cost situation just seems to get worse every day. Using June 2 futures prices, costs are forecasted to exceed $85/cwt. beginning with March 2009 sales. Thursday’s near-limit move for corn and limit move for soybeans will drive the cost forecasts even higher.
And the weather is not cooperating at all. As can be seen from Figures 1 and 2, corn planting progress and corn emergence are at or below the slowest paces on record. These do not mean a disaster is coming but this crop is going to need some help in terms of heat-degree days. It appears that corn will not be planted on 3-4 million the 86 million acres intended to be planted to corn. Late planting and emergence will, quite likely, result in below-trend yields. The big question now is “How much below trend?”
I hope next week’s Crop Production report will give us a better idea of what is to come but I don’t believe it will. After seeing May’s projected usage numbers, I fear that USDA is simply trying to make the numbers work instead of telling us what will be the logical result of high ethanol production on top of a disappointing crop. Prices will almost certainly have to go higher than the levels in the May report to drive ethanol, livestock, industrial use and/or exports to reduce corn usage.