It is difficult to believe that spot market carcass prices of $67/cwt. and futures contract prices in the $70s (and $80s for the deferred contracts) can leave the pork industry in a serious financial situation. But that’s the pickle in which we find ourselves this spring. Decent hog prices have not, and apparently will not, keep up with higher corn and soybean meal prices and producer losses are, to say the least, serious.
In a meeting on Wednesday, leaders of the National Pork Producers Council requested that Secretary of Agriculture Ed Schafer take several actions that will ease the economic hardships facing U.S. pork producers. Their requests included:
- A two-phase pork purchase program, the first entailing $50 million for pork produced from cull breeding stock. That would primarily involve ground pork and pork sausage from cull sows. This is not a sow buyout proposal similar to the program being initiated in Canada. It is simply a recognition that the primary impediment to a more rapid reduction of the U.S. sow herd is product movement, not slaughter capacity. NPPC says that the expenditure will remove just over 160,000 sows from the breeding herd.
- Authorize another $50 million to purchase pork products through the remainder of the year. The fear is that high slaughter rates in the fourth quarter (analysts predict just short of 31 million head for commercial slaughter) will burden the market severely. Timing is essential in such cases, and USDA should be ready to act, not be ready to get ready to act (or worse – not act at all), when the time comes.
- Be flexible in interpreting and implementing USDA emergency programs and loan guarantees to help producers purchase feed. NPPC (and many others) fear the situation where credit issues keep a producer from buying feed.
- Support and defend U.S. pork exports.
- Fully consider releasing Conservation Reserve Program acres that are not environmentally sensitive, without penalty, for the 2009 crop year.
- Fully implement the interdepartmental livestock task force.
Cold Storage Highest – Ever!
Monday’s Cold Storage report was quite a shock for most industry observers. Frozen meat and poultry supplies were 23% higher than last year and the largest ever recorded. Frozen pork stocks led the way at +33% for the year. Over 657 million pounds of pork were in freezers on March 31. The largest increase was in pork belly inventories, which were nearly 99 million pounds or 79% higher than last year and 25% higher than last month. Every category except variety meats showed a year-on-year increase.
The question is whether this increase in freezer inventories is product backing up due to large slaughter and production levels or product being staged for export. At present, the markets would suggest the latter.
If this were a product backup, one would expect cutout values and hog values to be falling, especially when slaughter totals are record large for the weeks in question and are much larger than the March Hogs and Pigs Report would suggest. But that is not the case. Cutout values have gained $10/cwt. (to just over $66/cwt. last week) and negotiated base hog prices have increased nearly $9/cwt. (to $61.44/cwt) in the past two weeks – and have kept going up this week. I heard of a live weight bid over $55 (that’s $73/cwt. carcass) this morning.
Another piece of evidence supporting the “staging” argument is that cold storage as a percent of production is not out of line. Figure 2 shows historical data for both actual cold storage and the percentage of monthly production in cold storage. Note that the spike in actual inventories has not driven the percentage in cold storage beyond the historical range. In addition, the peak in cold storage percentage nearly always occurs in February, March or April, so the timing of this increase is very logical as well.
The biggest storm cloud looming over this situation is the very real shortage of shipping containers for export. That story has become hotter this past week with several popular press articles appearing. It is a complex situation that is driven by the weak U.S. dollar, robust exports, falling imports (due to the weak dollar and a weakening U.S. economy), better-paying alternatives for shipping countries, high fuel costs and many other factors. The impact on U.S. pork exports is anything but clear right now, but it is certainly cause for some concern given that February saw over 20% of total U.S. production exported.
Canadian Pig Crop Report
The final piece of information relevant to the cause this week is the Canadian Hog Statistics Report. Some highlights:
- Canada’s breeding herd is 4.6% smaller than one year ago and the January breeding herd was revised downward from -1.9% to -3.3%. That fits better with anecdotal evidence back in January. The Q1 Canadian-U.S. (March in U.S. and April in Canada) breeding herd is smaller than it was one year ago.
- Total hog numbers declined by 11.7% with market hog inventories seeing the largest drop. This reflects large market hog shipments early in the year.
- The number of pigs under 44 lb. (20kg) is 9.8% lower than last year, reflecting higher shipments of pigs coming south.
- Lower – but not much lower -- farrowings and farrowing intentions. Q1 farrowings were 2.8% lower and Q2 intentions were only 1.6% lower. I expect the lower breeding herd to put more downward pressure on farrowings as the year progresses.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]