When low hog prices come, it never takes long for someone to call for lower market weights in order to reduce pork supplies and push prices back upward. It is a logical response that, if it worked, would have the desired outcome. The problem is that it hardly ever works. There were some good reasons, some of which still apply, and some of which may no longer apply. Let's consider the weight issue and how it plays out.
Hog weights have been on a more-or-less constant uptrend since the 1950s. Figure 1 shows monthly data for average hog carcass weights since 1986, and this long-term uptrend is clearly visible. The only clear exceptions to this uptrend occurred in the mid-1990s, in 2006 and in early 2007. All of those were caused by high feed costs. The question now is whether the most recent period will be merely another temporary slowing of the trend or mark an actual change in this long-term trend.
Factors Favor Heavier Hogs
There are good reasons why hogs have gotten heavier. First and foremost, the genetic potential of today's pigs is to deposit less fat than their ancestors at virtually all weights. This characteristic means that pigs can be taken to heavier end-weights without producing extra fat. So, more pounds of high-value, saleable product can be produced from each pig. Producers' and packers' fixed costs (plant and equipment depreciation, interest, taxes, repairs, etc.) and quasi-fixed costs (labor being the largest) can be spread over larger levels of output, thus driving total profitability.
Note that I call labor a quasi-fixed cost. It is technically a variable cost in that it goes away if production ceases. Labor, though, behaves more like a fixed cost in the short run because firms cannot just lay off labor and hire back equally skilled workers when economic conditions improve.
The proportion of costs represented by variable-cost items has fallen over time due to higher investments in confinement facilities and the labor to man them. This lower variable-cost level means that prices have to fall farther for average variable costs to not be covered -- the point in economic theory that says output should be reduced.
Finally, producers appear to treat feed costs as the only component of marginal costs -- ie., the additional cost of the last unit of output. The cost of feed needed to put on the last pound of gain has almost always been lower than the value of that pound, making the profit-maximizing decision easy: "Keep feeding them."
This behavior slowed in late 2006 and early in 2007 (Figure 2) as producers dealt with significantly higher feed costs. They seemed to adjust to those costs, though, and market weights again began to run 1 and 2 lbs. higher than in 2006 during the second half of 2007. That trend has changed again with weights equal to or 1 lb. lower than year-earlier levels in the past six weeks.
Renewed Call for Lighter Hogs
Feed ingredient cost increases since last fall have again precipitated calls for lighter hogs, and reducing weights with finish diet costs well above $200/ton is probably a good decision. But there is a problem: It couldn't be done, at least not until recently.
Consider Figure 3, the same weekly hog slaughter graph I showed last week but with a slaughter capacity for 5.5 days/week added. Could any more hogs have been slaughtered from October through January? Well, packers could have added even more hours, but that rarely happens and, when it does, packers usually run into severe absenteeism problems. So the answer is probably not.
But what would have to happen to slaughter for the industry to pull market weights back by 2 lbs.? The pigs to be slaughtered on Monday are already out there. And there are more out there for the next day and the next day and the next . . . well, you get the picture. So, to pull weights down by one day's growth (about 2 lbs.), we would have to make one day's worth of slaughter simply vanish. That cannot be done when slaughter runs are near capacity levels.
The good news is that it can happen now. Total slaughter has been below the 5.5 day/week capacity since the last week of January and, at current levels, we could process about 100,000 to 150,000 more hogs per week if the economics dictated doing so. The bad news is that at 100,000 to 150,000 more pigs/week, it will take three to four weeks to make that one day's worth of slaughter disappear.
It is a slow process. I urge producers to do what is best on your farm. Today's feed and cash hog prices suggest that lighter weights might be optimal. But do what is best for you and let the market translate that into a broader impact. Any reductions should help hog prices and move us a bit closer to profits.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]