USDA’s quarterly Hogs and Pigs report, released last Friday, contained no big surprises, although there were a couple of definite trends that may impact hog and pork markets in the weeks and months to come. The report is being viewed as slightly bearish for nearby futures contracts and slightly bullish for deferred futures contracts in today’s trading. The national data in the report appear in Figure 1.
As I expected, the report looks very much like one year ago, with all of the inventory numbers at or just above last year’s levels. The breeding herd, at 5.788 million head, is 0.5% larger than last year’s level, which, you might recall, was the smallest U.S. breeding herd on record. The March 1 herd was 10,000 head larger than the Dec. 1 herd, an indication of some continued rebuilding of the herd.
The market herd was 0.6% larger than one year ago at 58.176 million head. The increase was led by the 50- to 119-lb. category, up 1.5% from 2010. USDA’s estimate of the 180-lb. and over inventory at 100% of last year looks a bit high relative to March slaughter, which was down 1.2% through Friday. This report comes relatively early in the month, however, which means that a larger-than-usual portion of these 180 lb. and heavier pigs remain to be slaughtered. The discrepancy is a bit high, but not big enough to raise questions about the report.
The under 50-lb. inventory of 18.898 million head was 0.8% larger than last year. That number agrees reasonably well with Dec-Feb farrowings at -0.6% and Dec-Feb average litter size at +2%, as well as the pig crop at +1.4.
I made no adjustments to the USDA data for imports of Canadian hogs or pigs since those numbers have been reasonably stable since early 2010. I do not believe there will be enough deviation from year-ago numbers (or at least enough consistent deviations from last year’s numbers) to warrant adjustments of slaughter vs. current U.S. inventories.
Litter Size Growth Returns
The return to a 2% year-on-year growth in litter size is pretty much confirmed by this report. Only two quarters out of the past 12 – Dec-Feb last year at +1.3% and June-Nov last year at +1.0% -- have seen litter size growth less than 2%. And you can see that those two quarters were not exactly reproductive disasters. Figure 2 shows average litter size from 1986 to date. Note the growth rate in recent quarters.
The 9.8-pig/litter average for Dec-Feb litters is the highest ever for that quarter and the fourth highest on record. While these litter sizes are remarkable from a historical perspective, they still have a lot of room to grow. European litters are consistently larger than those reported by U.S. producers. Some U.S. farms have reached 30 pigs/sow/year, which means they must be weaning about 12 pigs/litter.
I have related many times in speeches my contention that the primary reason we have lagged behind the Europeans on litter size is that our feed was so cheap that we simply did not have to be that good to make a profit. As the popular saying goes – necessity is the mother of invention – so, while we still enjoy a feed cost advantage over our European cousins, the absolute level of feed costs today means we must spread the sow’s feed costs over more pigs. In terms of incentive, it looks like we have closed the gap on the Europeans.
Farrowing Intentions
My biggest concern for this report is that the farrowing intention numbers look far too low relative to the breeding herd. At 97.4% of last year, both the spring- and summer-quarter intentions are significantly below analysts’ pre-report estimates and imply a definite slowdown in reproductive performance. If the report is right, those intentions, plus the 2.856 million litters farrowed in the Dec-Feb quarter, would mark a significant deviation from the upward trend line for litters/sow that dates back to the mid-1990s (see Figure 2).
Pork Supplies and Prices
Figures 3 and 4 show Iowa State University's, the University of Missouri's and my forecasts for quarterly supplies and prices through Q1-2012. Forecasts from the Livestock Marketing Information Center (LMIC) were not available at press time.
To say there are differences would be an understatement. Forecasts based on projected quantity changes and a demand elasticity yield forecasts that are far below the current level of futures markets. Based on my Q1-2011 prices, a “normal” seasonal pattern would take prices into the mid- to upper-$80s this summer, and then see them decline to about $80 in Q4. Current futures prices are $10-$12 above those levels.
The most favorable Q2 and Q3 seasonal changes since 2001 occurred in 2008, when exports exploded during the summer months. Prices in Q2 were $16 higher than in Q1, and prices in Q3 were $8 higher than in Q2. Those same differences would imply prices averaging $96 in Q2 and $104 in Q3 this year. It took off-the-chart exports to China to get that done in 2008. I would consider those an upper boundary for summer prices and they do not differ much from current futures prices.
Actual prices in Q1 exceeded my forecast from the December report by about $5. I have adjusted my price forecasts for the next four quarters upward by roughly that amount to reflect stronger meat and pork demand. Futures markets are presently incorporating even stronger demand. I hope it happens, but the magnitude of the increase is so far beyond what we have seen before that I am hesitant to build it completely into my forecasts. I think it’s important to ask: Just how much better than $100/cwt. can we realistically expect?
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com