Canada’s breeding herd continued to shrink in the second quarter but it did so at the slowest rate since the fourth quarter of 2007. Statistics Canada’s Hog Statistics report, released on Thursday, showed the Canadian breeding herd numbered 1.3798 million head on July 1, down fractionally from the April 1 inventory of 1.383 million head and 4.6% lower than the inventory level on July 1, 2008. As has been the case for all of this large liquidation, the western provinces accounted for more of the decline (down 7.2%) than did the east (down 2.4%).
This reduction in Canada’s breeding herd, when combined with the 2.7% reduction in the U.S. herd on June 1, puts the Canada-U.S. herd at 7.347 million head, 3% lower than one year ago. The June-July count is 5.2% lower than the herd was at its peak of 7.752 million in October 2007. Several analysts, including me, believe that the combined Canada-U.S. herd will have to decline by about this same amount – 400,000 head – to balance supply and demand at price levels that will be profitable relative to higher costs.
Canadian producers intend to farrow 740,700 sows in the July-September quarter, 7.5% fewer than one year ago. Those intentions rise to 743,700 sows in the October-December quarter, only 2.5% lower than last year. Farrowing intentions in the eastern provinces for the two quarters are virtually unchanged (-0.5% and -0.6%) from last year, meaning virtually all of the future decline will come in the west.
Canada’s inventory of market pigs also continued to be smaller than that of one year ago. The count of “all other pigs” (meaning those not included in the breeding stock total) was 10.725 million, 7% lower than one year ago. In spite of significantly lower exports of weaned/feeder pigs to the United States, the stock of pigs weighing under 44 lb. was still down much more (-11.2%) than was the stock of heavier pigs (-3.7% and -7.4% for the 44-132 lb. and over 132 lb. groups).
This is almost certainly due to the intense pressure that recent markets have placed on producers who specialize in weaned pigs and that is especially true of those who sell those pigs on spot markets. Figure 2 shows spot prices for 10-lb. weaned pigs – and the picture is ugly to say the least. These prices get hammered from both sides. When lean hog futures fall or corn and soybean meal future rise, the value of these pigs goes down. There have been times this summer when that value was zero and there are few signs of any significant rally now.
Pork Supply, Hog Market Levels Cause Concern
Friday’s Cold Storage report from USDA was yet another piece of bearish, though reasonably expected, news. Pork inventories on July 31, at 547.331 million pounds, were 8.3% larger than one year earlier, but 27.5% higher than the average for 2003-2007. Ham stocks, though 5% smaller than last year, remain large by historic standards, exceeding the 2003-2007 average by 29%. Belly stocks were only 3.9% higher than last year, while total loin stocks were 16.2% lower than last year.
The problems, from a supply standpoint, in this report are in the “other” and “unclassified” categories. Those two are 25% and 30% higher than last year and they are not small categories. Only the total ham inventory (i.e. the sum of bone-in and boneless hams) at 137.8 million pounds is larger than these two. Stocks of “other” pork totaled 107.3 million pounds on July 31, while stock of “unclassified” pork amounted to 70.6 million pounds.
We don’t know much about these. They contain a number of processed products, such as sausages and bacon, but we don’t know much else. When they begin to account for a large proportion of total cold storage, it becomes a bit difficult to judge just where the marketing challenges might lie.
July 31 cold storage inventories represented 30% of July production. That number is 1.7% higher than last year’s figure, but about in the middle of historical levels. Those have ranged from an outlier low of 23.7% (3.2% lower than all other observations since 1998) in 2001 to a high of 34% in 2000.
Finally, this recent surge in federally inspected (FI) hog slaughter (Figure 4) has everyone concerned about hog numbers this fall. Last week’s run of 2.228 million was only 0.5% lower than last year and 2.7% higher than my forecast level based on the June Hogs and Pigs Report. That makes two weeks in a row that slaughter has been significantly higher than the report suggested. Is it because we backed hogs up with plant shutdowns and slower chain speeds in July? Or, because we have pulled hogs forward with unusually mild summer temperatures? Slaughter weights (201 lb. last week, +6 lb. from last year – again!) can support either argument.
The problem with the “pulled them forward” position is that it requires, at some point, hog numbers to fall short of expected levels unless future weeks’ supplies also grow at a faster rate. That caveat is important as we move into the fall.
What could happen to return the market herd to “normal” rates of gain? The weather will be cool. The corn will be fresh. I’m not sure we will see a hole in marketings due to the seasonal timing of this surge. If we have indeed pulled hogs forward, any eventual reduction will likely be feathered out over several (and perhaps many) weeks from this fall through next spring. Only time will tell, but I fear that these recent big weeks will not result in significant shortfalls in the fourth quarter.
It is so ironic that yet another “good” result for hog producers is causing market difficulties.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.