First, a correction to the Hogs and Pigs special report you received on Monday. Table 1 (attached) has the correct figure of 28.387 million head for the Dec.-Feb. pig crop last year. That means that the most recent Dec.-Feb. pig crop is 99.4% as large as last year – a number that fits much better with the 97% breeding herd and 102.6% litter size. The error did not affect my weekly slaughter forecasts since I use actual inventory numbers from the weight categories in those computations.
Tables 2 and 3 show my quarterly compilation of slaughter and price forecasts from Iowa State University (Dr. John Lawrence and colleagues), the Livestock Marketing Information Center (a cooperative data and analysis effort of over 30 land-grant universities), and Glenn Grimes and Ron Plain at the University of Missouri. Both tables show some differences of opinion regarding the slaughter and price implications of last week’s Hogs and Pigs report.
Projected quarterly slaughter numbers are generally lower than those following the December report. My forecasts and those of the Missouri crew show much more quarterly variation than do the others. In addition, I and Missouri have rolled the year’s largest year-on-year declines forward one quarter. Recall that both of us had Q2 down well over 5% after the December report, based on the report’s low Sept.-Nov. pig crop. This report indicates that Q2 slaughter will not be as low, but cumulative impacts of lower pig crops and reduction of imports from Canada will push Q3 slaughter down over 5%.
I think it is safe to say that these analysts expect slaughter to be 3-4% lower in 2009.
There is considerably less agreement regarding price levels (Table 3). It appears that I am the optimist of the group, while the Mizzou crew is the most pessimistic. The real challenge here is factoring out last year’s export-driven hog price bubble. Just where would prices have been had exports been “normal”? That’s a tough question because it is a road we did not travel – and thankfully so!
The national net negotiated price that I forecast averaged over $85/cwt., carcass, in the third quarter of 2008. If slaughter is 5% lower this year, one would expect that price to increase 10-15%, if all other factors are constant. That would clearly put prices above $90 this summer if all of those factors were still present.
Of course, they will not be. Exports will almost certainly not duplicate last summer’s robust performance. Most analysts have them pegged at 10-15% lower for the year, and that will probably include Q2 and Q3 shipments that are 30-40% lower than last year. The impact will not be zero, but when you start computing downward from the $90s, you could still end up with a pretty good price this summer. So mid-$70s is my story and I’m sticking to it. For now, I reserve the right to observe the No. 1 rule of price forecasting: Forecast often.
One conclusion is pretty solid, though: Chicago Mercantile Exchange (CME) Group Lean Hogs futures are not priced nearly as well relative to our fundamental-analysis (i.e. supply and demand analysis) price forecasts as they have been over the past 2-3 years. Futures pricing decisions are not near as easy as they have been. I still expect cash markets to carry futures upward and provide some pricing opportunities in late April and early May. They will not likely be as obvious as they have been, however.
Canadian Plant Off the Market
Maple Leaf Foods announced this week that its Burlington, Ontario plant was no longer for sale. It was sort of an “at least for now” announcement based on the poor economy and credit availability, according to the company. Those are good reasons, but I suspect that more Canadian pigs staying home for feeding and slaughter were perhaps just as important. Canadian packing plant utilization has been very high since exchange rates have shifted and mandatory country-of-origin labeling (COOL) has impacted movements of pigs southward.
Is this positive for Canadian capacity and a foreteller of woe for U.S. capacity? It could be, but I don’t think U.S. pig supplies will fall far enough, long enough to force a plant to close here. While small, the closure of Meadowbrook Farms’ plant in Rantoul, IL, does relieve a bit of pressure, which may be enough to keep others above water.
This shift of pigs and capacity is an outcome of COOL that I and others have predicted since day one. The ultimate outcome is that we will compete less with Canadian pigs and more with Canadian pork – either here in the U.S. market or in Japan, Korea or some other export market.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.