Hogs & Pigs Report Holds Few Surprises

First things first – Best wishes to all National Hog Farmer Weekly Preview readers from the staff, our sponsors and Paragon Economics for a happy and prosperous 2010!

USDA’s Quarterly Hogs and Pigs Report for December contained inventory estimates that were quite close to pre-report estimates but future production estimates that indicate more hogs than we had hoped for are coming in 2010. The report’s key numbers appear in Table 1.

Report highlights include:

• 59.957 million hogs kept for marketing. That is 1.8% fewer market hogs on hand vs. last year, but 0.5% more hogs than were expected, on average, by analysts in the pre-report survey. Every weight class was slightly higher than expected with the deviation being largest for the 120-179-lb. category. The 180-lb. and over category, at 97.8% of last year, agrees reasonably well with the slaughter count during December.

• Note that the data in Table 1 represent the new break point between the two lightest categories. USDA changed it from 60 lb. to 50 lb. to make U.S. and Canadian data more comparable. The report issued Wednesday contains revised data back to March 2008, to reflect this new delineation. However, any comparison between the new data and data for December 2007 and before must be made with care.

• 5.850 million breeding animals – a new low for the modern U.S. pork industry, 3.5% lower than the number of breeding animals on Dec.1, 2008. That number is slightly (0.1%) lower than the average of the trade estimates, but a full 1% lower than I had expected. There are two reasons for my higher estimate. The first was lower sow slaughter in the September-November period due to higher hog futures and, at least at the beginning of the quarter, lower corn prices. The second was lower gilt slaughter. The University of Missouri’s data for gilts as a percentage of total slaughter dropped to as low as 47.3% in late November and was below the steady-state level of 49.2 to 49.4% for seven of nine weeks during October and November. I hope USDA is correct, but I would not be surprised to see more pigs in 2010 than a “down 3.5%” breeding herd would suggest.

• The most important numbers in this report, in my opinion, are those for farrowings and farrowing intentions. Sep-Nov farrowings of 2.974 million litters were 1.8% lower than last year. That’s good news. But analysts expected that number to be down 3.1% – a difference of 1.3%. Ditto for the difference between estimates and actual for Dec-Feb farrowing intentions. While Mar-May intentions were close to analysts’ estimates, they are still high relative to the breeding herd. These higher farrowing numbers are no surprise either. I believe they are very likely correct due to last summer’s unusually cool temperatures.

• And litter sizes go marching merrily upward with the fall quarter’s 9.7 pigs saved/litter marking another new record and another quarter of year-on-year growth exceeding 2%. That makes nine quarters in a row with litter size growing by 2% or more.

• Finally, the Sep-Nov pig crop is estimated to be larger than last year’s. The increase is only 0.2%, but analysts had expected this pig crop to be 1.2% smaller than last year. Two years of huge losses would, one would think, cause pig numbers to shrink. But the pig number that eventually has the greatest impact on supplies is larger in spite of producers’ rationalization efforts. Fewer Canadian Hogs and Pigs
Readers should realize that imports of pigs from Canada will continue to decline in 2010, but the reduction will not be as large as last year primarily because the numbers are already quite low from a historic perspective. Figures 2 and 3 show weekly imports of market hogs and feeder pigs, respectively. I do not expect market hog imports to fall much below 10,000 head/week given the strong pattern that developed in 2009. I expect feeder pig imports to continue to fall as Canada’s breeding herd shrinks further, running around 20,000 head /week lower than in the past year. That reduction will reduce U.S. slaughter by about 0.5% from year-earlier levels on a more-or-less ongoing basis.

Pork Demand Holds the Key
The bottom line is that 2010 U.S. hog supplies are going to be very nearly as large as those of 2009. Many weeks will be virtually even with their year-earlier counterpart (Figure 3). My computations have quarterly federally inspected (FI) slaughter down only 1.2, 1.5, 0.6 and 1.2%, respectively, during 2010 with annual FI slaughter at 110.7 million head – just 1.3% lower than 2009’s total. It is doubtful that we will match the average slaughter weight of 2009, since it is unlikely that we will have another summer like last year. That will help hog supplies a bit, but total pork tonnage in 2010 appears to be headed for a number quite close to the 2009 figure.

That means demand will be the key issue. Will it be like 2008, with exports accounting for a growing share of U.S. output? Or, will it be like 2009, dodging bullets from all quarters to hold together just well enough to keep supplies moving?

I think hog prices will be higher because demand will be stronger. It had better be! Using a price flexibility of -3 and the percentage supply changes listed above only gets national net negotiated prices into the low $60s for the summer months. But those prices reflect this year’s demand challenges and I think we have to remove those from any forecasts. My quarterly forecasts as well as those of University of Missouri and Iowa State University economists are shown in Table 2. Note that all are still below the Dec. 30 closing Chicago Mercantile Exchange (CME) Lean Hogs futures prices.

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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com