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Dale Miller, Editor,
National Hog Farmer
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Hogs & Pigs Special Report
Positive - But
Not Resoundingly So
USDA's quarterly Hogs and Pigs Report, released last
Friday, indicates ample supplies of market hogs in the short term,
moderating supplies late this fall, and then some reductions in the
second quarter of 2009 and beyond. Those cutbacks do not appear to be
large enough to drive hog prices clearly into profitable territory and
smaller reductions in farrowings in the Dec-Feb quarter could drive
supplies back near 2008 levels in late 2009.
This report was almost precisely as expected by market analysts (see
Table 1). In fact, I have never seen one any closer than this. The
only differences of any size were in the 120-179-lb. inventory class and
the Jun-Aug pigs saved per litter category. The former implies that
market hog supplies in October and November will be larger than expected
and the latter implies that we will have to account for even higher
productivity from this point forward.
The 2.6% reduction in the breeding herd agrees closely with sow
slaughter and gilt retention this past summer, but it is still a bit
disappointing given the projected level of production costs for the rest
of 2008 and 2009. This reduction, especially when combined with the
increase in productivity, will not drive hog supplies down enough to
provide consistently positive returns next year. I expect further
reductions in the U.S. sow herd given the current outlook for
substantial losses this fall and current sow price levels.
Given recent corn and soybean meal futures prices, costs next year will
be just over $80/cwt., carcass. As you can see from my price forecasts
in Table 2, I think prices in Q2 and Q3 of 2009 may be high enough to
cover theses costs, but I do not think any other quarterly prices
through the end of 2009 will do so.
NOTE TO READERS: I will include my usual production and price forecast
tables which include the forecasts of Iowa State University, the
University of Missouri, and the Livestock Marketing Information Center
in this Friday's North American Preview.
Farrowing Intentions Baffling
One curious number in this report is the Dec-Feb farrowing intentions
figure. It indicates that after cutting farrowings by 5.5% in the
Sep-Nov quarter, producers now expect Dec-Feb farrowings to be only 2.9%
lower than one year earlier. It appears that some producers were
encouraged by the August price spike and added more gilts. Sow slaughter
slowed slightly, but not by enough to justify this rebound in
farrowings. And, such a quick recovery of farrowing numbers does not fit
with the need to reduce supplies further in order to bring profits back
to producers.
This report leaves Q4-2008 slaughter at unprecedented levels of nearly
31 million head. Note in Figure 1 that I still have eight weeks this
fall with Federally Inspected (FI) slaughter levels above 2.4 million
head - a level reached only once in history. I believe slaughter
capacity will be sufficient as long as we do not have a plant close due
to a fire, labor disruption, etc. Packer margins have returned to more
normal levels after a truly exceptional summer and they should be large
enough this fall to encourage high throughput levels. No surprise there!
This report does point to shorter - but not "short" - supplies in
December. This pattern could point to an early seasonal low for hog
prices, but we must remember that pork demand is basically on a downhill
slide from Dec. 1 onward as most holiday hams are purchased by then. If
this report is correct on the weight category inventories, though, much
of the supply pressure should be off come December.
Demand & Supply
I still think two items are critical:
- Demand has to hold up if U.S. producers are to see a return to
profitability. This report does not indicate a production cutback large
enough to drive prices to profitable levels unless much of the live hog
demand surge we have seen in 2008 remains in force. That statement, of
course, really boils down to this: "Exports need to stay strong."
Recent financial challenges will probably keep the U.S. dollar low, so
exports may continue strong. But I do not think we should count on the
kind of growth we have seen in 2008 to continue. It is just unrealistic
to think that we can continue to grow exports at this pace, especially
with China embarking on a major pig breeding herd buildup.
- The U.S. breeding herd and, consequently, U.S. output must be
reduced more in order to provide any assurance of ongoing profits. The
U.S. breeding herd, at 6.049 million head, is now 172,000 head smaller
than it was at its December 2007 peak. I still believe the herd must
decline by another 180,000 to 230,000 sows to see prices high enough to
cover higher feed costs over the next five years. I do believe U.S.
crop farmers will eventually get yields high enough to drive grain
prices lower, but that will take time and hog producers simply cannot
stand any more years like 2008 or, for that matter, 2009 as it looks at
present.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
North American Preview would like to thank our sponsors, PIC, Boehringer
Ingelheim, Novartis
Animal Health US, Inc. and Bayer.
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