Iowa State University costs and returns estimates show 26 consecutive, profitable months -- and yet the U.S. pork sector is growing only marginally as of March 1. Of course, that is the good news from Friday's USDA Quarterly Hogs and Pigs Reports. All of the key numbers from this report (which appear in Table 1) differ from pre-report estimates by a relatively small amount -- small enough that Chicago Mercantile Exchange (CME) Lean Hogs futures prices should not move dramatically on Monday.
The only numbers that differed from pre-report estimates by more than 1% were the inventories of pigs weighing under 180 lb. and the number of farrowings during the December-February quarter. All of those numbers were smaller than expected and thus would be bullish, if anything, for Lean Hogs futures.
The U.S. breeding herd grew by 84,000 head or 1.4% from last March, while the inventory of market hogs rose by only 0.6% from last year. Both of those numbers would indicate manageable supplies for the rest of this year and, thus, would be encouraging for hog prices if it were not for large current and potential supplies of chicken and beef.
Record Pork Production Slated for 2006
Producers should always keep in mind that the price strength during 2004 and 2005 happened in spite of the fact that production was higher both years (see Figure 1). In fact, both slaughter and production were higher in both 2004 and 2005 -- and production has now set a record for five years. The March inventory estimates indicate that 2006 will be more of the same. X and Y in Figure 1 indicate annual commercial slaughter and production forecasts of 104.75 million head and 2.111 billion pounds.
The question is whether demand can recover enough to overcome this year's production increase. That will be difficult with chicken prices at extremely low levels and cattle prices falling into the low $80s. Low prices of competing goods cause the demand for any product to fall.
Those slaughter and production estimates are conservative since we still don't have a good handle on the effect of Canada's corn import duty on the number of pigs that will be imported this year.
Confounding the effort to predict imports is the fact that we can't easily make year-over-year comparisons because one year ago the U.S. import duties on Canadian pigs kept those numbers artificially low. Suffice it to say that feeder pig imports have increased substantially over the past two months, and there could be a jump in market hog imports beginning in May because Canadian exporters can get corn duties rebated if hogs fed U.S. corn are exported.
Prices Still Profitable Through the Third Quarter
Weekly slaughter for the remainder of 2006 should be very close to that of 2005 given these inventory estimates, with only the fourth quarter exceeding last year by any marked amount -- about 1.5%. That adds to my feeling that the fourth quarter will see prices below breakeven, and that prices will remain profitable through the third quarter. Yes, less profitable than last year, but still profitable.
Crop Planting Projections Surprising
It's hard to believe but Friday's Prospective Plantings report may be as important to pork producers -- mainly because it was such a surprise. Acres planted to corn are predicted to be 5% lower than last year, while soybean acres are predicted to be 7% larger.
That caused new crop corn to set new contract life highs on Friday, and sets the stage for some active acreage-buying by new crop corn futures over the next few weeks. I'm not too excited about buying corn futures at contract life highs, but this situation could get explosive if planting troubles or a dry summer comes.
If the growing season is good, corn will be cheaper this fall than futures now predict -- perhaps much cheaper. Producers need to consider their corn needs and devise a strategy to control corn prices for the remainder of 2006 and into 2007. Out-of-the money calls would be one way to put a lid on corn costs.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com