Last Friday’s quarterly Hogs and Pigs report did little to allay fears that the North American pork industry is in for another year of economic difficulty. As has been the story in most recent reports, any reductions of productive capacity being made by U.S. producers are being almost simultaneously offset by rising productivity.
The key numbers from the USDA report appear in Table 1. Note that virtually all of the numbers are very close to analysts’ pre-report estimates, published last week per a survey by DowJones. Anything within 1% is usually deemed “as expected” and likely to be neutral for Lean Hogs futures. Early trading on Monday indicates that the market was a bit surprised by the size of the fall pig crop (down only 0.1%) and somewhat disappointed that the breeding herd was not lower – even though I don’t know how current data could have suggested a significantly lower breeding herd.
The only numbers that were a bit of a surprise relative to expectations were the 180-lb.-plus inventory figure at 99.9% of last year and the March-May average litter size of 9.61 pigs, up 2.5% from last year.
I was not surprised at all by the 180-plus number since it agrees quite well with June slaughter after adjusting for fewer Canadian market hogs. I thought the average pre-report estimate was low all along as it did not agree with June slaughter.
Litter Size Continues to Climb
The magnitude of the growth in litter size has been truly amazing over the past two years. Figure 1 shows average litter size on a quarterly basis from 1984 to present. As can be seen, the past eight quarters have seen the fastest growth on record, rivaled only by litter size growth in 1994 through 1997. The difference in these two time periods, of course, is that the mid-’90s growth was driven by massive structural change in the U.S. industry. More efficient, specialized and generally larger sow units were replacing geographically dispersed farrowing operations that were, in many cases, parts of diversified farming operations. Sows from specialized maternal lines under fulltime, professional management simply performed better than sows from traditional rotational breeding systems managed by producers who had to divide their time, expertise and talents among several, often-competing, enterprises.
From what I hear from some of the industry’s leading consulting veterinarians, it is no accident that the recent increase in litter size coincides with the advent of circovirus vaccines. Even with the periodic porcine reproductive and respiratory syndrome (PRRS) outbreak or a bout with true swine influenza, hog herds are simply healthier than they have ever been – and it shows. In addition, the ton or so of feed that a sow consumes each year now costs 20 to 30% more, providing a stronger incentive to save more pigs. Finally, the move to later weaning ages led to larger subsequent litters. Add it up and the increases in litter size are offsetting much of the reduction in the breeding herd – and pig survival rates are more than offsetting the remainder of breeding herd reduction.
Price Forecasts
Tables 2 and 3 show forecasts for supplies and price based on Friday’s report – and the picture is not pretty. Modest reductions in slaughter are coming, but much of it is driven by fewer imported market hogs and feeder/weaner pigs from Canada. At present feed costs (and those implied by corn and soybean meal futures), none of the quarterly prices in Table 3 are profitable. Q2-’10 Lean Hogs futures are very close at present, but this report will, perhaps, put more pressure on summer 2010 futures.
Some of the forecast numbers have likely changed since this survey was done in early June. The first 10 days of June saw a huge selloff in Lean Hogs futures and the continuing struggles of pork cutout values and cash hog prices finally, I think, got some producers thinking seriously about cutting sow numbers or exiting the business. Cull sow prices have fallen by 30-40% as sow offerings have increased.
Sow processors are taking more sows, but the pace of the reduction will be dictated by how well sow products like breakfast sausage, brats, etc. move to consumers. Prices of these products will decline some, but remember that many of these are branded, value-added products whose prices carry significant quality connotations. One doesn’t destroy many years of value-building by using fire sale prices, so these companies will be careful about how to use price to sell more product regardless of how badly some of us may want to ship some sows.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com