USDA's September Hogs and Pigs report is bearish — at least it appears to be. The September inventory survey put the swine herd at 79.099 million head, up 0.7% from a year ago, up 0.9% from the pre-release trade forecast, and the largest of record for this time of year.
The report implies that 2020 hog slaughter will be record high for the fifth consecutive year.
Yet, the futures market took the report quite well with all of the lean hog futures contracts closing higher on Friday, the day after the report's release. Why? It is likely that many traders decided the most bearish part of the report — the heavyweight inventory groups — over estimated upcoming hog slaughter.
The good news in the report is that the swine herd is 0.7% smaller than the June inventory and the two lightweight inventory groups were smaller than expected. The table below shows this year's Sept. 1 hog inventory as a percent of a year earlier both for the average of pre-release trade forecasts and for the USDA Hogs and Pigs survey.
USDA's numbers were higher than the average of trade expectations for all categories except pigs per litter and the two lightweight market hog classes — under 50 pounds and 50-119 pounds.
In a rarity, USDA made no revisions to past market hog inventory estimates in this quarter's report. Typically, USDA revises past market hog numbers to match with recent hog slaughter. The likely reason for no revisions this time is that the coronavirus' impact on industry workers and thereby hog prices has caused hog death loss and growth rates to fluctuate so much as to make definitive revisions impossible to make.
USDA said pigs per litter averaged 11.04 head during June-to-August. That was 0.6% below last summer and the biggest decline since June-to-August of 2014. The likely cause for the decrease is strict culling of baby pigs by producers in the face of low hog prices and limited space to house the large hog inventory.
USDA says the June-to-August pig crop was down 3.4% which is in line with the product of summer farrowings (down 2.9%) and pigs per litter (down 0.6%). The summer pig crop was lower than the year before for the first quarter since March-to-May 2014. It also lines up with the lightweight market hog inventory group which was down 3.5%.
The number of sows farrowed during June-to-August was down 2.9% which was less of a decline than the trade expected (down 4.3%) and less of a decline than the forecast in the June Hogs and Pigs report (down 4.6%). Farrowing intentions are down 4.5% for September-to-November and down 1.5% for December-to-February.
Sow slaughter is consistent with the low farrowing intentions. Sow slaughter has been up every week thus far in 2020 except the week of Labor Day. From January through mid-September barrow and gilt slaughter was up 1.8% but sow slaughter was up 11.7%. Net of Canadian imports, slaughter of U.S.-raised sows was up 14.1% or 250,000 head.
COVID-19 driven health issues among packing plant workers has reduced slaughter capacity causing a backup of hogs on farms. The inability to move hogs to slaughter on a timely basis led to euthanizing some animals and to diet modifications to slow rate of growth. How many hogs are "backed up"? I'll use several assumptions to come up with an estimate: the Hogs and Pigs inventory numbers are correct, marketings were current at the start of March, backed up hogs weigh at least 120 pounds and death loss has been average.
March-to-May hog slaughter was 2.8868 million below expectations, thus under the above assumptions 2.8868 million hogs were "backed up" on June 1. June-to-August expected hog slaughter was 34.3569 million head which would include the 2.8868 million backed up hogs from March-to-May. June-to-August actual slaughter was only 32.7993 million head. Thus, 1.5576 million head remained backed up on Sept. 1.
It is reasonable to expect the backlog would decline during the summer when marketings are typically the lowest of the year. But will it keep declining? Seasonally, fall hog slaughter is high.
There is good reason to believe that death loss has been above average in the last six months. If it has, then the estimate of 1.5576 million head backed up on Sept. 1 is too high. Several factors imply the backlog is declining faster. Often hog prices trend lower during September, but they have rallied this year, implying a tightening supply of hogs.
As would be expected given the changes in slaughter capacity, hog slaughter weights were very high in late spring, but have come down in recent weeks. The Iowa-Minnesota-South Dakota barrow and gilt slaughter weight series has been below the year-earlier level for each of the last four weeks. Light slaughter weights imply marketings are current.
If USDA's numbers are correct and hogs are marketed on a timely basis, 2020 commercial hog slaughter will total over 132 million head, up 1.7% from last year's record.
September and October slaughter will not match with the September heavyweight hog inventory groups because packers don't have the capacity to slaughter the huge number of heavyweight hogs on a timely basis. A larger-than-normal number of heavyweight hogs at the start of September will be delayed in marketing until later in the year.
When conditions are optimal, U.S. hog packers can slaughter 500,000 hogs in a single day and 2.8 million in a week. Since March, the biggest weekly hog kill is 2.6525 million head for the week ending on Aug. 29.
We are 70% through with slaughter of the 180-plus pounds market hog inventory group. USDA estimated the 180-plus pounds market hog inventory at 14.169 million head on Sept. 1, up 9.8% from a year ago. Since Sept. 1, federally inspected hog slaughter has totaled 10.020 million head and is down 0.8% year-over-year. In two more weeks, slaughter since Sept. 1 will have exceeded 15 million head and will be far below the 9.8% increase implied by the pig report. Slaughter will need to average 3.43 million hogs per week (up 28%) in the next two weeks to match the up 9.8% inventory number.