Canada's Oct. 1 quarterly Hog Statistics report revealed a swine breeding herd that was larger than one year earlier for the first time since April 2005. Canada's herd of 1.3083 million head was 0.1% larger than last year on Oct.1. When combined with the U.S. Sept.1 herd of 5.806 million head, the Canadian figure puts the U.S.-Canada herd at 7.114 million, 0.5% larger than one year ago.
This is the second quarter this year (the other being the March1-April 1 inventories) that the combined herd has been larger than one year ago. The U.S.-Canada herd had been smaller than one year earlier in every quarter since December 2007-January 2008 (Figure 1).
Is this the end of this round of consolidation/reduction for the U.S.-Canada pork industry? We think it is for a couple of reasons. First and foremost, it appears the reductions have, along with increased exports and relatively strong domestic demand, pushed pork and hog prices high enough to generally cover new cost levels. With U.S. lean hogs futures above $85/cwt., carcass, through next October, producers on both sides of the border are looking at profits. We don't think those profits are large enough to get much expansion but, after over six years of herd reduction, Canadian producers are no doubt happy with some stability. U.S. reductions lasted only four years, but stability is welcome here as well.
The other reason we think consolidation/reduction is probably over for now is that producers that remain are generally very good at what they do and, in many cases, have pretty strong balance sheets. My calculations show that U.S. producers have, on average, replaced about 40% of the equity that was lost in 2007-2009. Canadian producers lost far more than did their U.S. counterparts during their long downturn and likely have not healed as much, but the trend has at last turned. Those who remain are battle tested.
The cutbacks are not without other consequences. Canadian hog slaughter in 2010 was 11.3% lower than at its peak in 2004 (Figure 2). Higher market weights reduced the impact on total pork production to only -1.6% over that same period, but even Canadian pork production has taken a hit in the past two years, dropping by 2.3%.
The same thing has happened in the United States (Figure 3). The cutbacks here have been much more recent but much more dramatic. In just the past two years, slaughter has fallen by 5.3% and pork production has declined by 3.9% from their 2008 peaks. That 2008 peak was, of course, driven in part by the impacts of the 2007 introduction of circovirus vaccines, but the 2009-2010 declines would have been very large even without the unusual 2008 slaughter levels.
U.S. slaughter and production, of course, have been negatively impacted by the situation in Canada. The stronger Canadian dollar and mandatory country-of-origin labeling (COOL) have reduced imports of Canadian hogs from 10 million in 2007 to just 5.75 million in 2010.
We do not expect any reversal of the recent declines, but we do expect them to stop. The Canadian dollar is still strong and COOL is still the law of the land in the United States. Regardless of the World Trade Organization's (WTO) decision on Canada's challenge to COOL, which supposedly will be announced the end of this week, the law will remain in effect unless Congress changes it. The likelihood of that happening in the short run is quite unlikely.
While Canada does enjoy a bit of a feed-cost advantage from time to time, the advantage is small and often fleeting. We just don't see anything that will turn this thing to growth. Like most of you, we would settle for a bit of stability. It appears that time has finally come.
Sorry, No Charts this Week
Several pieces of data for our weekly Production and Price Charts were not available as of this morning due to Friday's observance of Veteran's Day. The data will return next week. You can see most of the data by clicking on "Prices and Production" at www.lmic.info.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.