The December USDA Hogs and Pigs Report, which came out just before Christmas, offered no surprises and came in as expected in terms of hog inventories. This led the industry to continue to expect that 2006 production would be about two percent over 2005. This in turn led me to conclude that 2006 U.S. prices would be about eight percent lower than in 2005. Well, a lot has happened since Christmas to change the outlook for the worse for hog producers.

The first thing that has challenged old forecasts is that Avian Influenza (AI) has turned from being a boon to the hog market to being damaging. During most of 2005, AI made Asian consumers look to pork for their protein needs. This supported export demand for North American pork. By the end of 2005 and into 2006, a lack of chicken demand in many countries made U.S. exports of chicken legs start to wane. This caused U.S. chicken supplies to jump and chicken prices to fall. Weak chicken pricing and surging chicken supplies usually translates into bad news for pork and this time was no exception. Figure 1 shows the pricing performance of U.S. chicken leg quarters, basis the U.S. northeast.

The only good thing about this graph is it suggests that some stability has set in. On top of the leg quarter challenge, the fact is there is an awful lot of white meat plugging up the U.S. chicken market as well. U.S. boneless breast prices have also fallen, largely due to an exceptional surge in supply. It is interesting to note that while chicken production is up by three percent compared to last year, breast meat production is higher due to storage stocks and changes in the makeup of the bird. That is, there is much more front end than there was only a few years ago.

Chicken is not the only problem. The fact is there is an awful lot more pork around than anyone expected. Certainly there is much more pork than indicated by the December Hogs and Pigs Report. Figure 2 shows the expected slaughter based on the Hogs and Pigs Report compared to the actual slaughter. The graph illustrates the first ten weeks covered by the report from the beginning of December 2005 through the second week of February 2006.

For the first ten weeks in which the December report is applicable, slaughter has exceeded expectations in seven weeks. Total cumulative slaughter over expected slaughter has amounted to one percent more than expected. While one percent may not seem like much, in the hog industry a one percent change in supply often leads to a five percent or more decline in price. Surprisingly high pork supplies coupled with the troublesome chicken market has resulted in some big problems in the hog sector.

To make matters worse for Alberta producers, the Canadian dollar took a turn firmer, gaining about two cents U.S. Of course, the challenges faced in the market were manifested in the price. Figure 3 shows the Chicago Mercantile Exchange lean hog contract from July 2005 through mid- February 2006. As can be seen, futures prices declined by about $10 during the month of January alone. As February began, however, prices began a relatively strong rebound.

Not surprisingly, the reduction in pricing is having a negative impact on producer margins. Producers across Canada dipped slightly into the red in the fourth quarter before sliding sharply into the loss column in the first month and a half of 2006. Figure 4 shows estimated gross margins before operating costs per quarter from 2001 through 2005 as estimated by Alberta Agriculture, Food and Rural Development’s Bert Dening, business development officer in Barrhead.

Source: Alberta Pork Market Review Winter 2005