USDA's quarterly Hogs and Pigs Report, released last Friday, indicates ample supplies of market hogs in the short term, moderating supplies late this fall, and then some reductions in the second quarter of 2009 and beyond. Those cutbacks do not appear to be large enough to drive hog prices clearly into profitable territory and smaller reductions in farrowings in the Dec-Feb quarter could drive supplies back near 2008 levels in late 2009.
This report was almost precisely as expected by market analysts (see Table 1). In fact, I have never seen one any closer than this. The only differences of any size were in the 120-179-lb. inventory class and the Jun-Aug pigs saved per litter category. The former implies that market hog supplies in October and November will be larger than expected and the latter implies that we will have to account for even higher productivity from this point forward.
The 2.6% reduction in the breeding herd agrees closely with sow slaughter and gilt retention this past summer, but it is still a bit disappointing given the projected level of production costs for the rest of 2008 and 2009. This reduction, especially when combined with the increase in productivity, will not drive hog supplies down enough to provide consistently positive returns next year. I expect further reductions in the U.S. sow herd given the current outlook for substantial losses this fall and current sow price levels.
Given recent corn and soybean meal futures prices, costs next year will be just over $80/cwt., carcass. As you can see from my price forecasts in Table 2, I think prices in Q2 and Q3 of 2009 may be high enough to cover theses costs, but I do not think any other quarterly prices through the end of 2009 will do so.
NOTE TO READERS: I will include my usual production and price forecast tables which include the forecasts of Iowa State University, the University of Missouri, and the Livestock Marketing Information Center in this Friday's North American Preview.
Farrowing Intentions Baffling
One curious number in this report is the Dec-Feb farrowing intentions figure. It indicates that after cutting farrowings by 5.5% in the Sep-Nov quarter, producers now expect Dec-Feb farrowings to be only 2.9% lower than one year earlier. It appears that some producers were encouraged by the August price spike and added more gilts. Sow slaughter slowed slightly, but not by enough to justify this rebound in farrowings. And, such a quick recovery of farrowing numbers does not fit with the need to reduce supplies further in order to bring profits back to producers.
This report leaves Q4-2008 slaughter at unprecedented levels of nearly 31 million head. Note in Figure 1 that I still have eight weeks this fall with Federally Inspected (FI) slaughter levels above 2.4 million head - a level reached only once in history. I believe slaughter capacity will be sufficient as long as we do not have a plant close due to a fire, labor disruption, etc. Packer margins have returned to more normal levels after a truly exceptional summer and they should be large enough this fall to encourage high throughput levels. No surprise there!
This report does point to shorter - but not "short" - supplies in December. This pattern could point to an early seasonal low for hog prices, but we must remember that pork demand is basically on a downhill slide from Dec. 1 onward as most holiday hams are purchased by then. If this report is correct on the weight category inventories, though, much of the supply pressure should be off come December.
Demand & Supply
I still think two items are critical:
- Demand has to hold up if U.S. producers are to see a return to profitability. This report does not indicate a production cutback large enough to drive prices to profitable levels unless much of the live hog demand surge we have seen in 2008 remains in force. That statement, of course, really boils down to this: "Exports need to stay strong." Recent financial challenges will probably keep the U.S. dollar low, so exports may continue strong. But I do not think we should count on the kind of growth we have seen in 2008 to continue. It is just unrealistic to think that we can continue to grow exports at this pace, especially with China embarking on a major pig breeding herd buildup.
- The U.S. breeding herd and, consequently, U.S. output must be reduced more in order to provide any assurance of ongoing profits. The U.S. breeding herd, at 6.049 million head, is now 172,000 head smaller than it was at its December 2007 peak. I still believe the herd must decline by another 180,000 to 230,000 sows to see prices high enough to cover higher feed costs over the next five years. I do believe U.S. crop farmers will eventually get yields high enough to drive grain prices lower, but that will take time and hog producers simply cannot stand any more years like 2008 or, for that matter, 2009 as it looks at present.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
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