USDA’s quarterly Hogs and Pigs Report, released Monday afternoon, indicated hog inventories quite close to expected levels, but also contains production forecasts that will likely be viewed as bullish in Tuesday’s trading. Analysts are calling the report anywhere from neutral to moderately bullish. The key data from the report appear in Table 1. Here are a few highlights:
• Inventories of market pigs and breeding stock were within 1% of the average of analysts’ pre-report estimates. Differences of that magnitude usually mean a neutral report, but note that all but one of the actual year-on-year percentage numbers is smaller than the analysts predicted. That fact may lead to some strength for Lean Hogs futures on Tuesday.
• While federally inspected (FI) hog slaughter has run ahead of year-ago levels for much of the fourth quarter, that is not true of December. Comparing equal numbers of weekdays and Saturdays for 2010 to 2009, FI slaughter this December has been only fractionally higher than last year, which agrees with USDA’s 180-lb. and over inventory and that is virtually equal to that of December 2009.
• Ditto for our other check of the Sep-Nov pig crop vs. the under 50-lb. inventory. Feeder pig imports from Canada are getting closer and closer to year-earlier levels, implying some stability in these numbers. In fact, I have not adjusted my weekly slaughter forecasts for May onward due to this stabilizing of weaner/feeder pig imports from Canada. The changes in these numbers have necessitated such adjustments in the past.
• Litter size growth has returned to 2% per year in this report, following a two-quarter slowdown into the high 1% area. This pushes the past three years back to an average litter size growth rate of 1.92% per year, the highest for any three-year period in history (Figure 1).
• The curious numbers in this report are definitely the farrowing and farrowing intentions figures, which were all lower than expected. Specifically, the March-May quarter intentions of 2.863 million litters were more than 3% lower than expected. Year-on-year farrowing intention changes that are larger in the downward direction than the change in the breeding herd obviously suggest lower sow productivity for the first half of the year. Most of that decline could be offset by larger litters, but the fact that the report includes a decline in sow productivity will likely be bullish for deferred Lean Hogs futures.
• As Figure 2 shows, weekly slaughter in 2011 will look very much like that of 2010, based on these data. Weights will be higher than year-earlier levels for the first half of the year and lower the second half, which suggests production totals will mimic the year-on-year weight changes. Assuming constant demand, annual average prices in 2011 will be close to those of 2010, but 2010 has had some screwy quarterly patterns due to performance issues tied to corn and feed quality.
I still contend that Lean Hogs futures markets are trading much stronger demand at the present time, making them higher than fundamental supply analysis would suggest. They may be right, since demand has certainly strengthened in late 2010, and a weak U.S. dollar should be quite supportive to pork exports and by-product values.
I expect national net negotiated prices in the upper $70s in Quarter 1, upper $80s to low $90s in Q2 and Q3, and mid- to upper $70s in Q4, with an annual average price in the low $80s for 2011.
Watch next week’s Market Preview for our quarterly compilation of analysts’ forecasts.
