One of the big questions in recent weeks is how much of a challenge is being posed by recent slaughter levels? It's a very good question as we approach USDA's March Hogs and Pigs Report, due to be released on Friday, March 30.
Large slaughter runs (Figure 1) the past two weeks and, a slaughter run that is another 1.8% larger through Thursday of this week, have many wondering just where the hogs are coming from. We all know that some marketings have been delayed by weather in recent weeks. But 5% year-over-year increases are just a bit out of the norm these days. And, should that 1.8% week-over-week increase hold for the remainder of this week, Federally Inspected (FI) slaughter will be 11% larger than one year ago.
I'm not alarmed yet. The fact is that we have seen slaughter below the levels expected from the December Hogs and Pigs Report for most weeks this year. That report said that slaughter should have been about 0.6% larger than last year. The cumulative totals for the year were still below that level (0.4%) until last week and is now at 0.9% - and apparently due to grow this week. But larger imports of market hogs from Canada (up 11% YTD from last year) have added about 0.2% to slaughter thus far in 2007. Had those been flat, the total increase in FI slaughter would have been 0.7%, very close to expected levels.
The next few weeks will be critical. Should slaughter remain significantly higher, it will imply substantially improved productivity and that could have important implications for supplies the remainder of this year. A key factor will be how quickly the porcine circovirus associated disease (PCVAD) vaccines become available. All reports indicate that the vaccines are very effective and will significantly reduce death losses. The rate of adoption/availability will be very important.
Meat Stock Supplies Down
Thursday did see some positive supply news for all meats, as the inventory of frozen meat and poultry as of Feb. 28 were 2.3% smaller than one month ago and nearly 15% smaller than one year ago.
Leading the decline on both measures were chicken stocks, which fell to 626.4 million pounds, their lowest level since March 2004. That number is nearly one-third less than the 923.7 million pounds in inventories one year ago. The largest reductions were in legs, leg quarters and thighs that usually enter export markets. These cuts, though, can have significant negative impacts on pork prices when they become very cheap, as they will enter least-cost formulations on many processed meats such as hot dogs and luncheon meats. Leg quarter prices recently went above $0.40/lb., nearly double the price of one year ago.
Chicken breast stocks fell again in March and are now nearly 20% lower than one year ago. These reductions in inventories and the year-to-date reductions in broiler output have pushed boneless/skinless breast meat prices back above $1.50/lb.
That price is nothing to write home about, but it is far better than prices near or below $1.00/lb. that we saw on two occasions last year.
Lower chicken stocks, lower chicken production and higher chicken prices will be positive for pork demand.
Pork inventories were virtually unchanged from last month and 9% lower than one year ago. Belly inventories came in just less than analysts' pre-report estimates and were actually smaller than at the end of January - where the January to February change is normally positive. The draw down was a main reason that trade observers prediction on Thursday afternoon was that the report would be supportive to Pork Belly and Lean Hogs futures.
Stocks of bellies, loins, ribs and butts were all significantly lower than one year ago, with their percentages ranging form 78.3% to 89.7% of last year. In addition, inventories of bellies, loins and butts were down from Jan. 31 levels. These are noteworthy because these four cuts usually enjoy a good deal of seasonal demand strength as spring and summer arrive. Lower stocks bode well for the need for product from daily slaughter in coming weeks.
To Hedge, Or Not
Chicago Mercantile Exchange (CME) Lean Hogs futures price are still higher than I had predicted based on the December Hogs and Pigs Report, so I am still saying that hedges appear to be a wise move.
Will better hedging opportunities arise? Good question. Producers must now weigh the higher slaughter totals of recent weeks and the negative price pressure that continued high slaughter may exert against the long-term tendency of June, July, August and October futures prices to rise in April.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.