Sow prices have plunged this week as large numbers of sows -- especially light ones, according to my contacts -- hit the market at a bad time of the year. A collapse in the sow market always seems like a kick in the ribs when you're down, since it always comes just behind low prices for hogs. It is a tough occurrence that, unfortunately, can hardly ever be avoided.
Figure 1 shows weekly averages of prior day slaughter sow prices from USDA's mandatory price reporting (MPR) system (part of report LM_HG201), as well as a 4-week moving average for U.S. sow slaughter. Note that the most recent data points (for the weeks ending Jan. 4 and 11) for sow slaughter are very low because they include both Christmas and New Year's weeks.
Prices for three weight classes are shown. They are highly correlated. Spreads between heavy and light sows tend to increase as sow prices increase (probably due to short supplies of big, fancy sows preferred by fresh sausage manufacturers) and to tighten when sow prices fall.
As you can see, last week's averages were the lowest since late 2002, when the light sow price went to $13. This week's average may well challenge that low, as yesterday's quotes were $17, $19 and $22 for the light, middle and heavy sows, respectively.
Readers should note that the sow prices in mandatory price reporting come from the largest sow slaughterers only. The size requirements of the MPR system exempt smaller, more regional sow slaughter firms and those firms tend to buy sows at even lower prices. In fact, USDA's daily slaughter sow report (NV_LS231) includes virtually all of the MPR sows and many of the sows bought by the smaller packers. The quote from the 231 report for Friday was $11, $20 and $22 (light, medium, heavy sows, respectively) and Agriculture Marketing Service (AMS) reports some low prices of just $2 and $3/cwt. at some country buying points.
Reasons for Collapse
There are three reasons for the collapse -- all part of a normal supply-demand driven hog cycle.
First and foremost, both U.S. and Canadian producers are cutting back their breeding herds. Imports of cull breeding animals (the data include boars) were just 1.3% larger for all of 2007, but were 6.2% larger for the fourth quarter. After two relatively slow weeks to start the year, they shot to over 9,000 head last week. Look for more to come.
U.S. sow slaughter (which includes those Canadian animals) was 2.4% higher for 2007, but was 3.5% higher than one year earlier in the fourth quarter. That means the extra Canadian sows were only part of the increase. U.S. producers are shipping them, too.
Second, it's not the best time of the year for sausage sales, so packers are reluctant to kill many more sows right now. The growth of dinner sausages, Italian sausage and bratwurst over the past few years, not to mention the ever-present pork usage in hot dogs, puts a decidedly warm weather seasonal pattern in sausage sales. It's just too early for this large supply to feed into that.
Finally, this surge is very likely comprised of a lot of under-conditioned sows. This is an estimate on my part and we will see if the USDA weight category data confirm it in weeks to come. High feed prices definitely discourage producers from adding condition to sows before selling them. And, the market still prefers those big sows that produce enough fat to make a good sausage product without adding trim from butcher hogs.
More Sows on the Way
And now the bad news: It will not get very much better soon. I think the Canadian industry is not far along (and may just be getting started) in the process of herd reduction. U.S. producers just began incurring losses of any size in October and the latest run-up in feed prices has really occurred in the past few weeks. Hog futures, while still good, relative to my cash price expectations for the rest of 2008, have faltered a bit. There are many producers contemplating just how long they want to hang on -- especially if they have grain to sell!
It would be pretty hard to get the low end of a bid range below $2/cwt. and I would have to think that this week's low bids would slow down the flow of sows a bit. Don't be surprised to see a low spike like we saw in 2002, but don't expect a recovery to $40 sow prices any time soon.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.