The Thanksgiving holiday usually marks (or is at least very close to) the seasonal low in hog prices. Cash hog strength this week definitely suggests that may be the case this year, in spite of a Thanksgiving week slaughter total that, even with a day off, still tallied more than two million head.
Figure 1 shows weekly national net negotiated prices. That price series has reached its lowest point since January 2004 when prices were coming off the fall 2003 lows. But it has strengthened this week so we may have seen the worst of hog prices for this fall.
One of the real benchmarks that I have been watching as we progressed through these big slaughter weeks was the November Cold Storage report, since it would be the first real measure of how we were handling the large supplies of October. That report was released just before Thanksgiving and indicated only a slight increase in pork inventories.
Figure 2 shows the monthly cold storage levels for the four major species and their respective totals. Note that total meat inventories are still lower than one month ago (2%) and one year ago (-1.2%). The decline is still being driven by much lower chicken inventories (-8%), while stocks of other species are up slightly -- a remarkable result given that October pork, beef and chicken production were 11%, 9.7% and 3.6% higher, respectively, than one year ago.
Canada's Financial Difficulties
We have mentioned several times the financial difficulties that Canadian producers are now facing. Those circumstances are definitely serious and show no signs of lessening any time soon. Note in our Price and Production Summary the status of hog prices in Canada and the change from one year ago -- only Alberta prices are within 25% of the level that they were at the same week last year.
One result of these difficult financial times is a surge of pig exports to the United States. In fact, imports of both feeder pigs and market hogs set records the week of Nov. 10. Year-to-date increases for feeder pigs and market hog categories now amount to 9.4% and 20.8%, respectively. Imports of cull sows and boars are up only 1.1% year-to-date.
Dumping Case Against Canada?
These hog import levels from Canada clearly exceed those that existed in late 2003 and in early 2004, when U.S. pork producers filed an anti-dumping case on Canada alleging hogs were being illegally dumped into the U.S. market. There is considerable concern in Canada that U.S. producers may file another case given the number of pigs coming south, and the fact that they are indeed being sold below the cost of production.
The situation, though, is fundamentally different now. Back in 2003-04, Canada's industry had been growing for 10 years while the U.S. industry had been contracting. U.S. producers had seen several years of losses, while the extent of losses that had occurred in Canada had been much smaller due to a favorable exchange rate. That all made for a volatile combination that prompted the U.S. action. And also recall that the U.S. Federal Trade Commission agreed with the charge of dumping, but concluded that U.S. producers had not been damaged -- mainly due to improved market conditions in 2004.
There has not been much talk in the United States about Canadian imports, and a possible trade case, but there is one factor that could change that quickly: significant payments by Canada's federal or provincial governments to keep producers in business. U.S. producers would view those payments, as well as payments made under Canada's income stabilization program, very negatively, since they would cause the Canadian industry to respond more slowly and to a lesser degree than market conditions alone would dictate.
Pricing Opportunities for 2008
Finally -- a nice rally in the Chicago Mercantile Exchange Lean Hog futures prices is providing another opportunity for pricing pigs in 2008. Fundamental analysis (comparing supply and demand information) does not suggest prices nearly as high as those appearing on the futures market at the present time. It's another time when producers need to look long and hard at what these prices mean for their operations. The 2008 contracts average about $68 carcass ($51 live) at present -- probably breakeven or better for many producers. And that may not be a bad result for 2008!
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.