The September Hogs and Pigs report, which shocked us with very large numbers of heavy pigs and some state inventories that defied "talk on the streets" was, in fact, lacking a bit in accuracy. Yes, that's a kind way of saying it was wrong, but we need to still be a bit careful with that conclusion. Let's recap the recent developments and what they may mean for the future.
Figure 1 shows weekly slaughter and includes the slaughter levels that the Hogs and Pigs Report implied assuming normal growth rates and sufficient slaughter capacity. The chart is informative on several counts.
- Weekly slaughter runs have been far short of the USDA-implied levels. If USDA's 180-plus inventory had been correct, 1.385 million of those pigs would be backed up on farms at this point. And a good number of those pigs were already backed up as of Sept. 1 when the inventory count was taken. Market conditions in the Corn Belt do not support that kind of backup — and maybe doesn't hint of any back up at all.
- Packer operating rates increased last week. The question is "Can this last?" given tight labor and the potential for coronavirus recurrences. The weekly federally inspected slaughter total of 2.73 million is well above our calculated 5.4 days per week capacity of 2.633 million. The way you do that is process 289,000 on Saturday. That number is the largest non-holiday-influenced figure since 291,993 were harvested the week of June 20. Moreover, today's estimated run of 490,000 head is the largest since March 31 just before plants began falling to coronavirus difficulties. This week's expected total is 2.65 million or so, supporting my contention that we can handle 2.7 million a week in a few weeks but not in every week.
- If we can make it past Thanksgiving without the Hogs and Pigs numbers coming back to haunt us, things will likely get better. That time period, of course, corresponds to the two heavy inventory classes that were +9.8% and +6.1% from one year ago. The next two categories were down 3.5% year-on-year, pointing to significantly lower weekly supplies late this year.
What are the odds of these positive supply data continuing? I think they are high, but I wouldn't pencil in smooth sailing just yet. The reason is weights and what they tell us in two different parts of the country.
First, the average weight or packer-produced pigs (i.e. both packer-sold and packer-owned) was a whopping 219.9 pounds last week, up another 0.5 pounds from the prior week and eight pounds heavier than last year. The 0.5-pound increase was good news, but the weight of these hogs has gone up by 6.5 pounds in five weeks.
Smithfield, of course, has the largest share of packer-produced pigs and where are the large majority of those? North Carolina. The USDA report indicates that supplies there were not nearly as large relative to last year as they were in Minnesota and Iowa, but our North Carolina contacts indicate there are still many, many hogs backed up there, perhaps as many as a million head. There is some new hope as the Tar Heel plant operated at higher daily levels last week — finally.
Second, producer-owned pigs' weights are on a rocket, too. See Figure 3. In fact, those animals were, on average, heavier than one year ago last week and are up 5.4 pounds in five weeks.
Even if USDA missed the 120-plus stocks high, there still may be a large number of those pigs that could still find their way to market. It is still quite possible to get run over to some degree by market-ready pigs over the next four to six weeks. Cool temperatures and fresh corn will bring a lot of hogs to market.
And the best part of this entire situation is that demand is excellent. Real per capita expenditures for pork in August, the latest month for which data are available, came in 6% higher than one year ago. See Figure 4. That monthly performance pulled the year-to-date figure to the plus side of the ledger, meaning that domestic consumer-level pork demand in 2020 has been better than in 2019. In spite of the havoc of coronavirus, pork demand is up for this year. That is a remarkable statement, I think. It means gains in retail pork sales have more than offset the damage to foodservice pork sales.
Add in continued strong exports (still larger than last year, though softer than earlier this year) and you get strong wholesale pork demand that has pushed the cutout value above $90. And add in fourth quarter pork supplies that are smaller (due in part to limited operational slaughter capacity) than normal fourth quarter supplies and you get a scenario in which $90 cutout could persist.
All of this is positive for the U.S. pig producer. Costs have creeped up with corn and soybean meal prices in recent weeks but the eight Lean Hogs contracts for 2021 average just over $75 per hundredweight at the close on Oct. 12. The sow herd has been reduced but we don't think the reduction is huge. Productivity will begin growing again. Our calculations still point to more hogs harvested in 2021 than in 2020, so are prices 8 to 10% higher than this year reasonable? We doubt it unless this year's strong demand becomes the Incredible Pork Demand Hulk next year.
Know your costs. Compute your expected returns from futures prices and options using realistic basis expectations. With your lender, decide just how much risk you can live with both as a business and as people. Take action! Doing nothing can be the correct action but it must be the result of a decision, not the fallout from inaction or indecisiveness.
Conditions are far better than they were and better than we expected. Let's make that continue for a while.