Price Outlook

U.S. hogs came under relatively strong downward pressure in January due to continued unprecedented slaughter rates in the U.S. Weekly slaughter of well over 2.2 million per week during the first two months of the year was 12 percent over 2007 and 15 percent more than the previous five year average. Pricing in the first two months of 2008 averaged about US$54/cwt on a carcass basis. That was 14 percent less than last year’s US$63/cwt.

Note that in the first two months of this year, pricing declined by a greater percentage than the rate of slaughter increased. That is relatively unusual. Since 2001, when quarterly slaughter increased, it increased by an average of 3 percent. That 3 percent average increase in slaughter was met by an average decrease in pricing of just 1 percent. In other words, price declined by less than the increase in slaughter. In some quarters an increase in slaughter did not even trigger a decrease in price, and prices actually rose sharply. This year in the first two months, price declined by more than the increase in slaughter. In fact, that was also the case in the fourth quarter of 2007 as slaughter increased 9 percent and pricing decreased 15 percent. That suggests that the market reaches a limit in terms of its ability to absorb hogs and the discounting becomes more severe.

All in all, I maintain that the pricing in the face of weekly kills of over 2.2 million head in the first couple of months of this year was reasonably robust. It is reflective of fairly strong U.S. market conditions.

Looking ahead to the remaining quarters of 2008, the main questions on the supply side relate to the level of liquidation in both Canada and the United States. The fact that Smithfield stepped up and announced a reduction of 50,000 sows over an unstated time period provides an example of what the largest hog producer in the world considers necessary. Beyond that however there is no shortage of stories or rumours about massive or at least large scale U.S. liquidation. In addition, on the supply side, the ongoing reports of a particularly “hot” strain of PRRS in the U.S. Midwest are also providing some market momentum. With regard to the U.S. liquidation or supposed liquidation, there is very little actual evidence. While absolute sow slaughter may be up over last year, all hog slaughter is also up over last year. Sow kill as a share of total kill however continues to run at about 2.9 percent this year, which is about the same as last year. While it is also true that sow prices dropped sharply in January this year, sow prices have also moved firmer into February. In other words, the anecdotal verbiage of liquidation is not being supported by the actual data.


On the demand side, of course the ongoing hope or promise of strong markets in China is also providing buoyancy to market bulls. Every time the presidents of Tyson or Smithfield say anything about possible or actual sales to China, the market reacts with enthusiasm.

For my part, I do not envision significant U.S. sow reduction (ie. more than 4 percent), at least in the first half of 2008. I say this because for the past three to four years, U.S. producers enjoyed an historic equity build-up. During that time of near uninterrupted profits, U.S. producers were just steadily and slowly expanding. In other words, strong profits did not cause them to expand sharply. Conversely, I do not see a period of losses running from November through the first quarter of this year as a cause for liquidation. U.S. production is centered on large scale commercial producers with a large capital, technical stake. They are not going to liquidate or cut back materially after even six months of losses. I could see strong liquidation in the second half or in 2009 if grain prices continue to soar and U.S. producers see little hope of recovery.

Meanwhile, also on the supply side, Canadian live exports to the U.S. in 2008 are literally soaring. Slaughter exports are up over 40 percent while feeders are up over 20 percent. This is a reflection of the very poor market conditions at work in Canada. That is, if it was profitable to finish hogs in Canada, feeder pigs would not be flowing across the border. With regards to market hogs, the fact that shackle space has declined, particularly on the Prairies, means that hogs have to move south.

Perhaps more interesting, but also more depressing in terms of what it says about the Canadian market, is the performance of pork trade. Figure 2 shows monthly pork trade (not live trade) between Canada and the U.S. for the three years from 2005 through 2007. The message of the graph is clear: Canada faces the prospect of being in a pork trade deficit position with the U.S. in 2008.


All in all the supply-demand situation is more uncertain that at any time in the last 10 years. The uncertainty relates not only to liquidation in Canada and the U.S., but also to disease and the Chinese potential.

Within the context of the uncertainty of live trade and U.S. sow numbers, Figure 3 shows U.S. quarterly slaughter from 1999 through my estimate of 2008. When the expected slaughter reductions are combined with Canadian live imports to the U.S., I am expecting that total U.S. slaughter will increase by about 1 percent in 2008 over 2007.

The quarterly slaughter forecasts suggest that quarterly pricing should be stronger than I had expected in my last quarterly report. I am forecasting pricing of about US$67/cwt, carcass basis, in the second quarter and an average of up to $74 in the third quarter. Fourth quarter average pricing should be in the $62 range. The third and fourth quarter forecasts are generally lower than the futures are suggesting as of the end of February.

Alberta Hog Markets

Livestock Section, Agriculture Division, Statistics Canada released the quarterly hog statistics in January. The report said that the Canadian sow herd declined 1.9 percent compared to last year. The Canadian market hog inventory dipped 6.5 percent. The western sow herd declined more than 2 percent and the eastern sow herd declined less than 2 percent. The western market hog numbers dropped 7 percent and the eastern market hog numbers declined 6 percent. The more rapid decline in market hogs compared to sows reflects that accelerating flow of weaners and feeders south. The Alberta sow inventory declined 5 percent, Saskatchewan’s dipped 3 percent and Manitoba’s declined 0.5 percent. In the east, the sow herd declined 1.3 percent in Quebec and 1.6 percent in Ontario. Figure 4 contains two graphs. The first shows the performance of the eastern and western sow herds while the second breaks down the three Prairie provinces.

The disappointment from the U.S. with regard to the report was palpable. U.S. producers and analysts were hoping to see a bigger decline in the sow herd. Steve Meyer of Paragon Economics in Iowa said in his National Hog Farmer's North American Preview, February 15 that “Statistics Canada's January 1 count of pigs on Canadian farms was, at least to me, quite disappointing ... Apparently, Canadian producers simply have refused to liquidate to any substantial degree as of the first of the year ... There are many indications that the liquidation in Canada has sped up over the last few weeks, but this snapshot paints a picture for very large hog supplies to continue through most of 2008.”

Missouri University’s Ron Plain is quoted as saying, “I would deduce that all of the talk about massive reductions in the Canadian swine herd are overdone. They are reducing, but at a very slow pace.” Plain claims to not have been surprised, however. Reuters Canada says that, “the Canadian numbers ...did not surprise Plain, who had expected a slow reduction in that herd” (ca.reuters.com/article/businessNews, February 14).

Plain may not have been surprised, of course, but I was. The resilience in the face of over $20/head losses on average in 2007 is extraordinary. Then again, while the 2 percent decline in the last quarter was modest, it is worth remembering that this is the ninth straight quarter of reductions. In addition, I would not be surprised if the herd numbers get revised downward in the next report.

It is also interesting to note that the sow herd in the east declined less than in the west. We all know why the Quebec herd did not decline much, but we won’t go there. Then again, the fact that the Quebec herd declined at all, despite ASRA, says a lot about the state of the industry there. In Ontario, the province’s land-based hog farmers are likely benefiting from the fact that they are landbased. The farm grown feeds are cushioning the losses and they may be able to offset hog losses with grain sales. This, however, is not tenable for the longer term. Nevertheless, when the Ontario farm system is set up for feeding home grown corn to hogs, the long term can often outlast even the most difficult periods. In fact, some systems are advantaged with higher corn prices.

Alberta Price Forecasts

Based on the U.S. forecasts in combination with a par exchange rate, I think that Alberta Index 100 prices could range from $115-$120 in the second quarter. The third quarter should be over $130 while the fourth quarter will drift down to the $105-$110 range.

Even if you prefer to substitute the futures prices instead of my U.S. price forecast, the implications are for a very difficult year for Alberta hog producers.

August 2008