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Bullish and Bearish Numbers

Article-Bullish and Bearish Numbers

Steve Meyer

USDA’s quarterly Hogs and Pigs report, released on Friday, was once again a mixture of bullish and bearish numbers with market supplies a bit bearish and breeding herd numbers a bit bullish in the long run. The key numbers in the report appear in Table 1.

Some highlights of the report are:

  • Sharply higher reproductive performance. The 9.48 pigs saved per litter for Dec.-Feb. is the highest ever for that quarter, the fourth highest since 1983 and the highest mark since June-August 1996. The increase continues a string of seven quarters of year-on-year growth of 1.8% or more with the Dec.-Feb. 2.6% increase being the largest. The increases coincide with two major changes in the U.S. industry. First, producers began late in the process of moving to later weaning ages on many farms. That change had two main benefits: Higher quality pigs and larger litters in subsequent litters due to allowing the sow a bit more recovery time. It appears to be paying off. The other change was, of course, circovirus vaccines. While most of the impact has been felt at the grow-finish level, the vaccines have had a positive impact on sow units as well. As Figure 1 shows, litter sizes have been going up more quickly, matching the pace set back in 1995-1997, a time of major structural change in the industry.

  • A smaller-than-expected U.S. breeding herd. USDA estimates that the herd is at 6.011 million head, 3% smaller than last year. But will this reduction result in fewer pigs? Given the growth of average litter size, that is the question. Dec.-Feb. farrowings are right in line with the breeding herd, so adding 2.6% from larger litters would drive pig numbers close to last year, right? Wrong! The Dec.-Feb. pig crop is pegged at 97.4% of last year in spite of 97% as many litters and litter size at 102.6%. Those figures don’t fit, but we usually charge on using the pig crop number which implies lower June-Aug. farrowing intentions. But we will make a note to follow up on these figures in future reports.

  • Somewhat larger-than-expected middle-weight market hog inventories, implying that the “shortage” of pigs this spring may not be as large as I thought last fall. Recall that the Sept.-Nov. farrowings were sharply lower (down 6%) than those of 2007 and that the Sept.-Nov. pig crop was 3.7% lower than one year earlier. However, this report says that the two weight categories comprised of those pigs are only 2.5% smaller than last year. Those are 1.3% larger than analysts expected, so that may take some luster off the May, June and July contracts on Monday (March 30). We will watch closely over the next few weeks to discern whether slaughter follows the December report pattern more or less than this pattern from the March report.

  • Summer farrowing intentions that are reasonably in line with the sow herd, but lower than analysts’ predicted. These could be bullish for deferred contracts.
Canadian Imports Hold the Key
The trick for predicting supplies using this report has nothing to do with the report. It is how far imports of Canadian pigs will decline this year vs. last year. Market hog imports will impact slaughter immediately, while reduction in weaned/feeder pigs imports will reduce slaughter 20-24 weeks later. I use 21 weeks, realizing that it may not be 100% accurate.

Figure 2 shows my forecasts for weekly slaughter levels using reductions of from 2% down to 0.4% down for lower market hog imports through year’s end. I also reduced future slaughter by 2% starting in early August when early March imports would be ready for market. My feeder pig import reduction falls gradually to 0.4% in Q1-2010.

The net impact of the March report is to increase my forecast for 2009 federally-inspected slaughter marginally to 110.5 million head, 3.5% lower than that of 2008. Those numbers compare to my December forecasts of 110.456 million head, 3.6% lower than in 2008.

If the March report is correct, then the quarterly patterns will change a bit, though with Q2 being higher and Q3 being lower. I expect Q2 slaughter to be 3.4% lower while Q3 slaughter is 4.9% lower. Q4 slaughter will be 3.6% lower, but will still amount to 28.498 million head.

As predicted in December, the first quarter of 2009 has indeed been a tough one. National weighted average net price averaged $56.91/cwt., carcass, through last week, about $2/cwt. lower than my Q1 forecast coming out of the December report, which in spite of Q1 slaughter, has been about 1% lower than I expected.

I now expect the average national weighted average net prices for both Q2 and Q3 to be in the range of $74 to $78/cwt., carcass. I expect Q4 prices to be in the $61-$64/cwt., carcass, range bringing the forecast range for the 2009 annual average to $66 - $69/cwt., roughly $1 lower than I had forecast in December.

Watch this week’s North American Preview for my normal table including the slaughter and price forecasts of several noted analysts.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]