Kevin Grier, Senior Market Analyst

Price Outlook

The U.S. hog market has been characterized by a choppy up and down pricing pattern during the first four months of 2007. Alberta hog producers may well have been concerned about the depressing performance of U.S. pricing during March, but April looks to have gathered momentum for a strong spring-summer run. Figure 1 shows national average U.S. hog pricing on a carcass basis for 2001-2005, 2006 and the first four months of 2007.

As noted in the last quarterly report, it has been of interest to note the long profit run of U.S. hog producers. Iowa pork producers remained profitable in February despite high feed costs, according to Iowa State University Extension livestock economist John Lawrence. In his monthly estimate of livestock returns, Lawrence said Iowa farrow-to-finish pork producers made an average profit of $24.51 per head in February, up from $11.47 per head in January. February marked the 37th consecutive month of profits for farrow-to-finish producers, the longest stretch of profitability on record, Lawrence said. Iowa producers finishing weaned pigs were also profitable in February, with returns averaging $18.66 per head compared to $6.90 per head in January. Iowa producers finishing feeder pigs made an average profit of $7.78 per head in February, Lawrence said. These same producers lost an average of $5.44 per head in January. Average break-even costs for feeder-pig finishers rose to $47.18 per hundredweight in February, from $46.50 per hundredweight in January (iowaagconnection.com, April 11).

With regard to forecasted hog pricing, the place to start is on the supply side. Since my last quarterly report to Alberta producers, the United States Department of Agriculture (USDA) released its March Quarterly Hogs and Pigs Report. The report provided a picture that was very similar to previous reports over recent years. That is, U.S. producers are planning a steady, cautious increase in sow numbers and farrowings over the next year. In fact, if the numbers are to be believed, U.S. producers do not intend to increase farrowings at all during the spring and summer quarters of this year. Overall, based on the March Hogs and Pigs report, I can see that U.S. hog slaughter will continue its steady, gradual upward trend. Figure 2 shows the trend in U.S. hog slaughter on a quarterly basis from 1988 through the first quarter of 2007 as well as my forecasted slaughter for the coming three quarters of 2007.

Once again, it is worth repeating that the fascinating aspect of the U.S. industry over the last several years is how steady production has been. Given the incredible string of profitability, normally it would have been expected the profits of that length of time would have encouraged more production growth. Conversely, if the soaring costs of grain, and therefore weight gain, were to cause U.S. producers to slip into a loss position, I don’t expect that production would decrease. In other words, if 37 months of profit does not encourage bullish expansion, I doubt that even half a year or more of modest losses would encourage industry contraction. This is an industry built on long-term commercial producers.

In fact, the USDA picked up on this theme in their April edition of the Economic Research Service’s (ERS) Livestock, Dairy, and Poultry Outlook. ERS says the “breeding herd increases, occurring in a market environment dominated by higher and more volatile corn prices, suggest that the relatively new structure of hog production in the United States makes the industry less prone to rapid, large changes in breeding herd numbers — positive or negative — in response to external shocks. Contracts — both production and marketing — and high fixed costs of operating farrowing facilities are just two of the many features of the current structure of U.S. hog production that militate against large swings in breeding herd numbers. The cautious, muted producer response to significant feed price changes is different from sector response patterns of 25-30 years ago, when double-digit percentage changes in breeding herd inventories in response to price shocks was not uncommon.”

Separately, with regard to U.S. pork exports, the USDA’s ERS unit says U.S. exporters shipped more than 528 million pounds of pork in January-February, an increase of about 9 percent over last year. A number of export markets registered double-digit year-overyear increases: Japan (27 percent), Russia (13 percent), and South Korea (21 percent). Exports to Mexico — the second largest U.S. export market — fell 17 percent in the first two months. Japan’s year-over-year volume increase suggests that the largest importer of U.S. pork products is back in the market after some retrenchment last year. Japan accounted for 36 percent of U.S. exports in the first two months, a share almost three times that of South Korea (13 percent), and almost 10 times larger than Russia’s share (5 percent). It is likely that Japan will be a very important source of export growth this year. On the basis of large year-over-year increases in exports to important foreign markets, together with increases in 2007 forecasts for major pork importing countries, USDA’s forecast for 2007 pork exports was raised to 3.340 billion pounds, up from 2.997 in 2006. Exports in 2007 are expected to be almost 12 percent higher than those of 2006.

The net result of the supply and export demand situation is that pricing is expected to be generally stronger in the next four quarters than in the previous year. The following table shows forecasted pricing in the U.S. on a carcass basis for the remaining quarters of 2007 and the first quarter of 2008 in comparison to the corresponding quarters in the previous year.

Prairie Hog Markets

Maple Leaf announced that it would close the hog slaughter operations at the Saskatoon Mitchell’s plant by June 1, 2007. Saskatchewan hog producers knew it was coming sooner rather than later. Nevertheless, the formal announcement helps bring focus to the necessary decisions that need to be made in the coming months. Maple Leaf is going to need Saskatchewan hogs if it is going to run a second shift at Brandon. The company has been trying to sign Mitchell’s producers to five-year contracts for Brandon. An effective double shift plant there would eventually kill about 4 million per year, at least. That means that the plant needs about 200,000 sows supplying Brandon if you use 20+/- pigs per sow as a guide. Manitoba has about 375,000 sows according to a recent inventory report. Let’s look at how those sows are currently utilized (roughly):

• 160,000 Manitoba sows are dedicated to shipping weaners and feeders south. That is based on the fact that 4.5 million weaners and feeders went through North Dakota last year. I arbitrarily assumed that 80 percent of those were based in Manitoba. If that number is going to change, it is going to increase, not decrease.
• 40,000+/- sows are dedicated to U.S. market hog shipments.
• 40,000-50,000 sows are producing for Springhill.
• 5,000+ go provincial or elsewhere.
• Total non-Brandon hogs = 240,000-250,000

That leaves about 120,000-130,000 Manitoba-based sows that are left over for Brandon, which needs 200,000 sows for a double shift. Of that available total, about 45,000 will be Maple Leaf owned after paring down its herd. The bottom line is that I think Maple Leaf might need upwards of 80,000 sows from Saskatchewan. Note that Saskatchewan only has about 130,000 sows.

Furthermore, Saskatchewan may be even more important in the future. That is because the Manitoba government is not likely to allow growth for a few years, or until the NDP is no longer in power, whichever comes first.

For its part, Olymel Red Deer also needs Saskatchewan hogs, especially since it is targeting a second shift at Red Deer for early 2008. Obviously Maple Leaf needs to get the upper hand on Olymel.

Meanwhile, the prospects for a new plant in Saskatchewan are reasonably good as far as those things go. That is the prevailing thinking based on discussions with Saskatchewan producers and those that work with them. Plans for a new plant in Saskatoon are going full steam ahead. At the very least, there is too much infrastructure, momentum and government support for it not to at least continue along the path of exploring prospects and finding partnerships.

The size of plant is typically said to be in the 20,000/week range. I am not sure why that number was chosen but it likely has to do with perceived supplies within the radius of the proposed plant. It is also roughly the same size as Mitchell’s. I am not sure those are good reasons for deciding on plant size but that is another story. There are over 1 million market hogs within two hours of Saskatoon which can support a 20,000/week plant. In order to ship to this plant, producers would have to buy in. In that regard it appears to be taking the form of a new-generation co-op.

So basically, Saskatchewan producers need to decide between Brandon’s five-year contract and waiting for a new plant. It is pretty hard to do both given that there needs to be commitment to the new plant if it is to get off the ground.

Producers are talking of marketing through SPI to wherever SPI can sell them until a new Saskatoon plant comes on line.

With regard to Brandon, Maple Leaf has received licensing approval and commenced wastewater upgrades to support a second shift expansion. Interestingly, the company has also said that it is on track to meet labour requirements supporting phase one expansion. Labour was always a big problem so that is good news. The initial intent is to increase hog kill from 50,000 to 75,000 hogs per week. They are planning a second shift kill as early as the summer/fall of 2007. There should be a full double shift kill/cut by the end of 2009. The timing of winding down the Winnipeg kill plant has not been announced and is likely dependent on the Brandon process. Maple Leaf’s Warman Road Winnipeg cut processing plant is regarded by the firm as modern and efficient. It will play a supporting role for Brandon for the foreseeable future.

Meanwhile the process of selling Burlington and Lethbridge is going to be started in the latter half of this year.

Hog Inventories

Statistics Canada recently released its April inventory report. That report showed that Alberta sow numbers declined by about 2 percent on a year-over-year basis as of April 2007. Overall the entire Canadian herd declined by a similar amount. In contrast, however, the Saskatchewan herd increased by about 2 percent while the Manitoba sow numbers increased 1 percent. Figure 3 shows the trend in western sow numbers from 1997 through April of this year.

The graph shows that Alberta has been trending sideways for several years while Manitoba has been steadily increasing. Alberta’s share of the western herd has declined from 32 percent in 2000 to 28 percent in April 2007. Interestingly, over that same time frame, Saskatchewan’s share has stayed steady at about 18 percent. Meanwhile, Manitoba’s share has increased from 46 percent to 51 percent.

Alberta Price Forecasts

Based on those U.S. forecasts noted above, it would appear that prospects for pricing in Alberta are also going to be promising. At the same time, however, the appreciation of the dollar is also placing downward pressure on Alberta pricing. The Bank of Montreal notes that the loonie rocketed higher in April, anticipating a hawkish stance by the Bank of Canada due to stubbornly high core inflation and still-solid underlying economic fundamentals while U.S. weakness persisted. February’s real GDP growth was well above expectations, providing further fuel for the C$ to close the month on a high note. On the commodities front the Bank of Montreal noted that oil and metals prices rose for the most part, giving the loonie a little more luster. Narrowing interest rate spreads with the U.S. are also giving the C$ a boost. The Bank of Montreal says that further strength could be in store for the C$ in the near term, as it definitely has momentum on its side. But we could see a slight retreat later this year, as U.S. economic risks build and fears grow that Canada could be dragged down with its neighbour. The C$ may also succumb to a touch of political uncertainty with a potential Federal election on the horizon (BMO Capital Markets Economic Research, May 1).

For the purposes of this forecast, I am using a C$ at 90 cents. Based on the U.S. forecasts as well as the 90 cent dollar, I expect that Alberta Index 100 prices should range around that $145/ckg for much of the spring and fall. By the fourth quarter and into the first quarter of 2008, however, pricing should decline to the $125/ckg area.

Spring 2007