Wednesday's Quarterly Hogs and Pigs report from USDA was another "yawner" in terms of surprise numbers. The key numbers (see Table 1) were, with only one exception, within 1% of analysts' pre-report expectations.
That one number, the year-over-year change in the 120-179-lb. class of market hogs, was offset completely by deviations in the opposite direction in the 60-119-lb. and over-180-lb. categories. While I use the weight classes to help predict marketing patterns, these offsetting percentages leave me without too much concern over the one deviation of a mere 1.1%.
The watchword in this report, as in the past four, is "steady." Steady growth in the breeding and market herds with that growth basically accounting for population and export growth. In fact, the number of pigs in this report, when combined with probable reduction in Canadian imports and the fact that weights may not grow at all in 2007, means that per capita domestic pork availability could end up lower in 2007.
Still, we have to factor in slightly higher hog numbers as we look at the 2007 price forecast, at least until the import and carcass weight situations become clearer.
Given that caution, this report says that hog supplies will be 1.3%, 1.4% and 1.9% larger in the first three quarters of 2007, respectively. Fourth quarter slaughter will be about 0.5% larger than in 2006.
These numbers mean that 2007 prices will look much like 2006 prices. Should weights indeed end up lighter, '07 prices could actually be higher. Still, I'm forecasting roughly equal prices for next year, with national net weighted average prices averaging $57-61 in the first quarter, $63-67 in the second quarter, $64-68 in the third quarter, and $58-62 in the fourth quarter. That gives an annual average in the $61-$65 range. The average national net weighted average price thus far in 2006 is $64.15.
My forecast sounds almost ridiculous when you consider Figure 2 and the fact that the eight Chicago Mercantile Exchange (CME) Lean Hogs Futures contracts averaged just over $67 on Wednesday. I'm just a forecaster, but those prices are set by people betting real money. You can decide which has more credence. Regardless, futures prices that far above my forecasts tell me that this is still a pricing opportunity for a portion (25 to 40%, perhaps) of next year's production.
While a good report for price prospects, this report really only means that producers have a decent chance of breaking even in 2007. I think breakeven prices will end up near $50 (live) or $67 (carcass). By those numbers, even the futures prices are in the breakeven range.
While 2007 may well be a challenge, make it a happy one for you, your family and your employees! Happy New Year and thanks again for your faithful attention!
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com