USDA’s quarterly Hogs and Pigs report, released on Friday says the pork sector is still growing and market hog supplies will continue to expand into the first half of 2018. The key data from the report appear in Figure 1 below.
Virtually all of the significant numbers are very close to analysts’ pre-report estimates. Only one key number — March-May farrowings differed by more than 1%. This led us to expect a non-issue day for lean hog futures on Friday, but they were higher then and are higher in trading today, July 3. In fact, every contract from now through next April except October has hit contract life highs during one or both of those trading sessions. Part of the bullish momentum is coming from funds which have been buyers of several ag commodities over the past few days. The report itself was neutral to nearby futures and maybe bullish for the deferred contracts if you believe the farrowing intentions.
- The U.S. breeding herd continues to grow as producers add sows to provide pigs for the expanding pork packing and processing sector. The U.S. breeding herd grew by roughly 100,000 head in 2016, and we believe it will likely match that growth rate this year putting the Dec. 1, 2017, herd at 6.19 million head.
- The market herd of 65.581 million head was the second largest on record. It suggests that slaughter in the second half of the year will be well beyond the record levels of 2016. The inventory of pigs weighing 180 pounds and more on June 1 was close enough to June slaughter to not cast doubt on the report.
- Lighter-weight categories suggest that third and fourth quarter slaughter will grow at about the same pace as indicated by EMI Analytics forecasts based on the March report. See Figure 2 which contains our forecasts as well as those of Iowa State University and the Livestock Marketing Information Center for the next four quarters.
- March-May farrowings numbered 3.06 million litters, 3.1% higher than one year ago. That figure appears a bit ambitious relative to the increase in the breeding herd, but the relationship fits recent quarters in which USDA has been much more accurate in its pig crop estimates. USDA’s revisions to past reports were very, very small in this report —a testament we think (or at least hope) to improved estimates from USDA.
- The farrowing intentions figures appear low. While they agree with analysts pre-report estimates — that doesn’t make them right — and USDA has had a recent pattern of these intentions numbers being too low. An example: Actual March-May farrowings are currently estimated to be 50,000 larger than was predicted by March’s intentions for the quarter. We suspect that the intentions figures will be at least 1% lower than the actual farrowings for the next two and have incorporated that discrepancy into our forecasts for 2018.
- Recent strong prices have driven our near-term price forecasts higher (see Figure 3). We begin our forecasts for 2018 with the first and second quarter prices lower than those of 2017 based on expected higher hog numbers and heavier market weights. Our forecasts are generally in line with Lean Hogs futures contracts for the first half of 2018 but are higher than those of both ISU and LMIC.
Problems with Mandatory Price Reporting
A major topic of discussion among producers and packers the past few years has been the continuing decline in the number of hogs for which prices are being actually negotiated. The share for those hogs among total hog marketings fell to 2.4% last year and has averaged even less than that this year. A number of industry groups, including the National Pork Producers Council, have passed measures to encourage producers to negotiate more hogs and thus put the price discovery mechanism on a broader base. Some would say those calls have fallen on deaf ears, but I would argue that they have run head-long into economic incentives that have left producers more willing to formulate prices than negotiate them. The National Pork Board is now planning an educational symposium for early September with the goal of teaching producers the how-tos of negotiating hogs in today’s market environment. We all hope the effort will help.
Amid this difficultly, the last thing we need is for negotiated sales not to get reported to USDA or not get published by USDA once they are reported. But that is apparently what happened the week ending June 22. I have heard from very reliable sources that at least one load of hogs fetched $90 hundredweight carcass in negotiated trades on separate days that week. Both involved our newest packing plants with one load going to MoonRidge Pork in Missouri and one to Prime Pork in Minnesota. But the published tops of the negotiated price range on the Iowa-Minnesota prior day purchased swine report (HG204) for the two days in question were $89 and $88.25 hundredweight. Those were also the top prices on the national prior day purchased swine report (HG200) for those days. Ditto for the Western Corn Belt version (HG208).
Would those loads have moved the weighted average prices for that day? Yes, some. On one day they would have moved the weighted average by $0.18 per hundredweight and the other day, due to a higher volume of negotiated hogs, they would have moved it by only $0.04 per hundredweight. The $0.18 per hundredweight day there were roughly 155,700 hogs priced by hog/pork market formulas or other purchase agreements, two categories that frequently rely on the Western Corn Belt price quote. That price difference meant producers received about $59,000 less for those formula hogs, assuming they all used the WCB weighted average. If all of those 155,700 hogs had been priced of the midpoint of the range that day, the price difference would have been $0.8725 per hundredweight ($90 - $88.25 = $1.75/2 = $0.8725) and the value difference would be just over $285,000. For the $0.04 per hundredweight day, the value impacts would have been about $11,000 had the weighted average price been used in the specified formulas, and $135,975 had the mid-point of the range been used.
We know that the USDA wants to be accurate in their price reporting to the trade and that new plants always have some kinks to work out. However, the industry and the USDA knew that these plants were coming at least two years ago. Further, the USDA re-issues corrected reports on a regular basis. What would be a big deal if a new plant made a few mistakes? The failure to report just these two sales cost pork producers thousands of dollars. MoonRidge has been operating since last September and Prime Pork has been up for nine weeks at the time of these incidents. How many other days have producers lost money because the USDA is not getting these data reported and published?
The Livestock Mandatory Price Reporting Act specifies that the USDA uses intended capacity to determine whether a new plant is of sufficient size to be required to report. Both of these plants, by their stated capacities, easily meet the 100,000 head per year threshold. And MoonRidge meets that criteria even if its lower-than-capacity operating rates to date are considered. Note that the act’s name is “Mandatory Price Reporting Act” not “Mandatory If You’re Not a New Entrant In Which Case We’ll Cut You Several Months of Slack” Act.
The biggest question these incidents beg is “What is going to happen when the Triumph-Seaboard and Clemens Foods Group plants open in September?” Are they going to be allowed not to report or is the USDA not going to publish their data for a few months? I expect that the fact that both of these companies are already reporting will make a difference but now I wonder. I’m hoping the companies and the USDA have all of their ducks in a row to get started as soon as those plants are operational. Producers deserve as much. It won’t make much difference whether producers negotiate more hog prices if the USDA doesn’t get them reported and published.