Canada's inventory of hogs and pigs continues to shrink. Statistics Canada's quarterly Hog Statistics report, released last week, indicates that the Canadian sow herd continues to decline slowly and that the large death losses of 2005 and 2006 have abated somewhat. I am confident that the latter occurrence is largely due to wider availability and use of circovirus vaccines.
Figure 1 shows the year-over-year percentage change in the United States, Canadian and combined breeding herds. Note that the 1% decline for July 1 breeding animal inventories represents the smallest year-over-year decline for the Canadian breeding herd since the fourth quarter of 2005.
The declining reductions in the Canadian herd suggest more stability, but that may be an illusion for two reasons. First, the Canadian dollar continues to creep closer and closer to par with the U.S. dollar. It was $0.95US last week and the stronger it gets, the more it hurts Canadian producers and packers. Second, mandatory country-of-origin labeling (MCOOL) is a certainty and it will put pressure on Canadian weaned pig and market hog prices. That will be a help to Canadian packers in the short run, but will exert new economic pressure on Canadian producers.
Readers should note that Statistics Canada made some major revisions to some past data in order to square it with last year's Canadian Census of Agriculture. The revisions went all the way back to the first quarter of 2003. It doesn't appear that they changed the year-over-year numbers much, but the raw numbers are definitely different.
Canadian producers farrowed 1.2% fewer sows in April-June 2007 than they did during the same period in 2006. The second quarter pig crop, at 8.597 million pigs, was only 0.5% smaller than last year. Canadian producers plan to farrow 1.5% more litters than they did in 2006 in the third quarter and 1.1% fewer litters than last year in the fourth quarter.
Deaths and condemnations were 21% smaller this quarter vs. one year ago and were the lowest since the third quarter of 2003.
The July report also included information regarding the number and size of hog farms in Canada. Those data indicated that the rate of consolidation since 2001 has been more rapid in Canada than in the United States. Canada had 11,497 hog farms in 2006, 25.7% fewer than in 2001. The number of hog operations in the United States fell by 19.2% during that period. The average Canadian farm grew by 45% from 2001 to 2006, when the average inventory was 1,308 head. The average U.S. farm grew by 28.6% to 948 head during that same period.
Variability Spurs Wild Ride
It has been a wild ride for pork packer margins recently -- as can be seen in Figure 2. The normal implication is to expect a wild ride for hog prices and that could well be the case here. But a source of this recent volatility is variability in the cutout value (See Figure 3).
It's not often that we see that kind of bouncing around and I have to attribute it to the rumors regarding potential shipments to China. They are still playing hardball, apparently, but several sources report orders are being placed. Packers are talking to producers about removing ractopamine from feeding programs in order to provide more product that is acceptable to Chinese buyers this fall.
There have been a number of articles appear in the past week that claim to know of large numbers of pigs dying in China. The articles in the New York Times, Wall Street Journal and an online scientific journal point to large losses, underestimates by government officials and, most telling to us economists, an 85% increase in Chinese pig prices. The Chinese government will not allow tissue samples to be sent to international agencies, leading some to believe that the problems are due to more than just a virulent strain of porcine reproductive and respiratory syndrome (PRRS). PRRS would not harm China's export status, but the active presence of classical swine fever, foot-and-mouth disease or some other trade-impacting disease certainly would.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.