U.S. Market Outlook

When it is all said and done, 2006 is going to go down as another good year for the U.S. hog industry. Figure 1 shows the hog price performance for the 10 years from 1996 through 2005, as well as for the year of 2005 and for 2006 to the estimated price for November. As can be seen from the graph, the industry was not able to avoid the usual fall price decline, but it went into the fall from a very lofty perch. As such, the seasonal decline was much less bothersome than might otherwise have been the case.

As can be seen on the graph, 2006 started very poorly as the entire protein complex was dragged down by the negative fallout from the chicken avian influenza problems. The pork industry does not perform well when there are tons of chicken legs backed up from export markets and looking for a home. Once that situation began to clear in the spring, the hog sector exploded in an above seasonal average spring-summer price bounce.

That above average bounce in the spring set up the strong showing in the final quarter of 2006. With regard to 2006, as noted earlier, it is going to go down as another good year for U.S. hog producers. In fact, according to Iowa State University (ISU) data, it appears that every month in 2006 is going to be profitable for midwest farrowto- finish operations. That comes on top of a complete profit sweep in 2005 and 11 out of 12 months in 2004. It is not often that hog producers see about 35 straight months of profits.

Furthermore, the profits in many months were extraordinary. For example, ISU estimates June farrow-to-finish closeouts brought back over $40/head while August was over $30/head. The engine that is driving those profits is U.S. pork exports. According to the United States Department of Agriculture Economic Research Service (ERS), the U.S. pork industry exported almost 220 million pounds of pork in September, over 7 percent more than in September 2005. Exports for the quarter were more than 653 million pounds, almost 4 percent greater than in the same period a year ago. On a cumulative, nine-month basis, U.S. exporters have shipped almost 12 percent more pork to foreign markets than in the first nine months of 2005.

Of the three countries that typically account for the lion’s share of U.S. pork exports — Japan, Mexico, and Canada — Mexico and Canada have registered year-over-year increases. In 2005, Mexico and Canada accounted for 31 percent of U.S. pork exports, and that share has increased slightly this year to 32 percent. Japan, on the other hand, continues as the largest foreign destination for U.S. pork. But cumulative, year-over-year export quantities are almost 8 percent lower than in January-September 2005. So far this year, Japan accounts for a significantly lower share of U.S. exports.

Last year Japan’s nine-month average share was 41 percent. This year, Japan has accounted for 33 percent — still the largest of any foreign customer, but much smaller than a year ago. Through September of this year, U.S. export volumes and average export shares of such countries/regions as Russia, South Korea, Hong Kong, Taiwan, Central and South America, the Caribbean and Europe have increased.

Meanwhile, ERS also notes that U.S. importers bought more than 74 million pounds of foreign pork in September, about 14 percent less than in September 2005. For the January- September period, U.S. imports of 735 million pounds were 1.5 percent below a year ago. Most U.S. pork imports originate from Canada and Denmark. So far this year 79 percent of imports have originated from Canada and about 11 percent from Denmark. Third quarter imports from Denmark are off by more than 21 percent. Imports from Canada are down more than 6 percent.

Exchange rates are the variables most likely responsible for driving imports lower. The low-valued dollar, relative to the Canadian and Danish currencies, makes imported pork products more expensive than they would be otherwise, causing importers to reduce import quantities.

With regard to 2006, it appears that the U.S. will settle on an average annual price of about $64/cwt, carcass basis. While that forecast is down 6 percent from 2005, it still represents a sizeable premium over what would have been the case only six years ago, given the expected supplies and production. In fact, overall production in 2006 should amount to an increase of about 1-2 percent over 2005. It is important to recognize that there is a great deal of favourable activity going on to generate a price level that high.

Moving into 2007, perhaps not surprisingly, I am forecasting record slaughter and production. That should not be surprising because that seems to be a common theme each year. Figure 2 shows U.S. slaughter on a quarterly basis from 1988 through the forecast for the last quarter of 2006 and the four quarters of 2007. Despite the higher production and slaughter in 2007, I am expecting to see steady to modestly higher U.S. hog pricing. While 2006 prices averaged $64, I expect that 2007 will at least equal that mark, or higher. The first quarter of 2007 should average around $66 compared to the avian influenza-hampered $58 in the first quarter of 2006. From that point I am watching for a solid bounce to near $70 in the second quarter and $68 in the third, compared to $66 and $70 in the second and third of 2006.

Moving into Alberta, the forecasts are very much contingent on the Canadian dollar wild card. As of this writing, the Canadian dollar is showing some fairly significant depreciation as the futures markets trudge along below $0.88 Cdn for most of 2007. That of course has a major impact on Canadian dollar hog pricing as the lower the Canadian dollar goes, the higher the hog price goes. Assuming an $0.88 Canadian dollar, the following are the Alberta forecasts for the first three quarters of 2007.

Prairie Situation

The October Statistics Canada inventory report showed that the Alberta sow herd declined by over 2 percent on a year-overyear basis. The overall Western herd was up marginally as both Manitoba and Saskatchewan sow numbers increased by nearly 3 percent. Figure 3 shows the Western sow herd as well as the Alberta sow herd. As can be seen from the graph, the Alberta herd has been relatively stable over the last several years, while the Western herd, driven largely by the growth in the Manitoba weanling export business, and the depreciated currency, exploded. Again, as can be seen on the graph, Western growth has been relatively flat for several quarters. It has been a year and a half since the Western herd has grown by more than 2 percent.

Meanwhile, in Eastern Canada, the sow herd declined by over 3 percent and the total Canadian herd declined by nearly 2 percent. The Eastern herd has been declining for four straight quarters and six of the last 10 quarters. Declining sow numbers in Canada are something that U.S. hog producers are not used to seeing. Leading U.S. analysts and the United States Department of Agriculture (USDA) have been looking north and trying to determine what the declining Canadian herd means to them and to the future of the North American industry. For example, the November ERS report, Livestock, Dairy, and Poultry Outlook, contained an article entitled “Canadian Pork Sector: Big Problems Up North.” The article says, “The loss of the Canadian pork industry’s competitiveness in international markets due to a high-valued currency may be a factor contributing to the problems that Canada’s largest packers — Maple Leaf Foods and Olymel — are currently experiencing. Maple Leaf Foods recently announced a plan to close all but one of its packing plants by 2009, while Olymel signaled its intention to remedy the problems it is experiencing in Quebec's pork industry.”

When the USDA and other leading U.S. analysts are writing about all the problems in Canada, you know something big is happening. Clearly the biggest thing is the fact that Maple Leaf is selling or mothballing five plants and expanding Brandon to two shifts. Meanwhile, Olymel has hired former Quebec premier Lucien Bouchard to do a review of its operations. That may have at least indirect impact on what Olymel does on the Prairies.

With regard to Maple Leaf, the net result is that the company is going to be selling or mothballing 4.5 to 5 million head of capacity on an annual basis. After the company double shifts Brandon, hopefully before 2009, the net result will potentially be a loss of up to 2.5 million head capacity. That net result is not necessarily bad news for the Prairies. The real brunt of the situation is going to be faced by Ontario, unless someone takes over the Burlington plant or other capacity is added. Figure 4 shows the relationship between slaughter capacity on the Prairies and slaughter marketings on a weekly basis.

Weekly slaughter capacity is the maximum volume of kill that occurred on the Prairies in the noted year. Slaughter marketings are defined as kill on the Prairies and slaughter exports off the Prairies to the U.S. It does not include weaner and feeder marketings to the U.S. The graph shows that for the most part, from 2001 through 2006, slaughter marketings exceeded the capacity to kill those marketings.

The last bar on the graph shows some year in the future: “200?.” That is the year in which I assume the Maple Leaf closures occur and the Brandon plant is double shifted. The net message of the graph is that when this occurs in “200?” (likely 2009), the net relationship between capacity and marketings is not going to change much. More importantly, the capacity situation does not even assume a double shift at Olymel Red Deer. When that happens the situation will be even better for Prairie producers in “200?” or sooner.

Meanwhile in Saskatchewan, Sask Pork is examining options for maintaining shackle space. Among the options are purchasing the Mitchell's facility, building a new slaughtering plant or partnering with Maple Leaf or a new player on a new plant. Sask Pork chair Shirley Voldeng says the immediate concern is that suddenly there will be 850,000 pigs that still need to be processed but will have no place to go (Farmscape for November 8).

Sask Pork general manager Neil Ketilson notes, in 2004 prior to Maple Leaf's decision to replace the aging Mitchell's plant, Sask Pork had conducted a comprehensive study of the potential for pork processing in the province and created a business plan based on producer involvement in partnership with a major player that would be capable of marketing the product after the fact. When Maple Leaf announced the plan in 2005 to build a new plant, those plans were put on hold and we just relaxed because we were quite satisfied with having a plant and a significant firm in town. What we're doing right now is going back to that former plan and reviewing the numbers if you will. Ketilson says options will be explored over the winter and, within five to six months, the agency should have some clearer direction in terms of what possibilities might exist.

Fall 2006