Contraction on the horizon

Current environment is described by some long-time producers as the worst stretch of losses since the debacle in 1998/99.

Dennis Smith

May 1, 2023

5 Min Read
Real Pork – Pigs Arriving to Finisher Top View (1).jpg
National Pork Board

Admittedly, I was shocked when the March Quarterly Hogs and Pigs report measured zero contraction in the U.S. hog herd. The numbers were 100% across the board on total hogs, kept for breeding and hogs kept for market. My thought was how could the industry not be in some sort of contraction in the wake of months of losses, months of drained equity? The report did contain a hint at possible contraction down the road with farrowing intentions for March-May pegged at 99% with June-August intentions reported at 97%.

The current environment is described by some long-time producers as the worst stretch of losses since the debacle in 1998/99, when pig prices dropped to 8 cents a pound in the fall of 1998. That was 25 years ago.

The current negative profit environment has been fostered by moderate hog prices, sky high corn and soybean meal prices for over two years, rising interest rates, rising labor costs and in many cases labor shortages and challenging issues associated with porcine reproductive and respiratory syndrome and porcine epidemic diarrhea.

Through the first four months of the year the slaughter pace is up 1.6%. So, seemingly, the USDA annual pork projection, at 27.360 billion pounds, up 1.3% from last year would appear accurate. Certainly, the March Hogs and Pigs report did not force them to lower their annual projection.

Current production rates coupled with the current demand for U.S. pork has kept the carcass value depressed and cash hog prices flat to lower. Plenty of pork has been available to meet sluggish demand and the losses have continued.

However, my sources are suggesting that dramatic changes may be just around the corner. I'm hearing (this information is unconfirmed at this moment) that a major contraction in breeding stock will occur this summer. One very large producer has supposedly made the decision to liquidate up to 10% of their herd as soon as possible. I've heard of two 10,000 sow units in Iowa that have recently lost their financing. Regarding the large producer, I'm told that inefficient farms, especially those consistently fighting PRRS, will be totally liquidated.

It's well known that no one has been immune to the sustained losses in the industry so I'm assuming other large producers (there's no small producers left) are likely making similar decisions. This contraction won't show up in the June Hogs and Pigs report but it should be fully measured in the September report.

Globally, even if U.S. pork production is steady to up 1%, global pork production is expected to decline. The sharp drop in production in the EU is well documented. Production in Mexico is not increasing and producers in Brazil have been challenged by high corn prices until just recently.

As always, China is the major wild card. Currently pig prices have been trending lower and remain well below the cost of production. However, evidence is strong that China is currently battling another serious outbreak of ASF. The over-production, we believe, is occurring due to another massive liquidation. Not only are they likely culling sows in huge numbers but also sending butcher hogs to market, quickly, before they are diagnosed with ASF.

A report recently issued by Rabobank indicates they expect pork production in China to begin dropping and pig prices rising by the end of the second quarter. They also conclude that sometime in the third quarter the Chinese may be forced to begin importing pork in larger quantities. This could set up an interesting market in the fourth quarter.

If aggressive U.S. contraction has started, it would begin to impact butcher hog numbers sometime in the fourth quarter. If China were to enter the U.S. export market at roughly the same time, hog prices could get spicy in a hurry. In fact, it's my opinion that pork prices and hog prices will bottom long before production begins to drop off. I believe this because currently pork in North America is the cheapest pork in the world.

Now, if both large domestic end users and our major export customers realize that major contraction is occurring, they'll have a great incentive to begin booking pork now, locking in current prices rather than waiting six to eight months. They can book aggressively now and take shipments over the entire year. It may be no coincidence that last week both pork sales and shipments were pegged at marketing year highs.

The situation with corn prices and high feed input costs has potential to improve dramatically over the next few months, in my opinion. First off, beef production will be down nearly 6% this year from last year and we fully expect a similar decline in beef production in 2024. With the possibility of steep hog herd contraction this summer, one must then expect lower corn demand from the livestock sector next year as well. The ethanol industry is suffering as diesel fuel prices and crude oil prices decline in the face of a slowing economy. Corn exports so far this year are dismal, down 33% compared to USDA projections of down 25%. Unless prices drop hard, it’s difficult to expect much of a recovery in exports next year.

Brazil is taking over as the No. 1 corn exporter in the world. Sadly, it's rather obvious that China would rather do business with Brazil than the U.S., including importing corn. U.S. acreage devoted to corn production is projected higher this year and if the U.S. experiences a normal growing season, trendline or higher yield will provide a record large corn crop, on the back of a record large crop out of South America. Indeed, a major jump in production in the face of continued slow demand could easily find ending corn stocks north of 2 billion bushels one year out.

So, in summary, the current bleak situation facing U.S. hog producers may change by the fourth quarter. In fact, if I'm correct about end users stepping up their bookings of cheap pork, it may start changing much sooner than the fourth quarter. In the short term, look for the June lean hog futures contract to test key resistance between $94 and $95. Without something dramatic happening, odds are this resistance will not be penetrated. Active hedging at resistance is advised but focus on keeping the upside open especially in the deferred contracts.

Smith publishes his widely followed evening livestock wire daily for clients and subscribers. For a free 30-day look at this research contact him via email

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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