"The US market put in an exceptional performance during the summer. In the last edition of this report, I noted that during the second quarter, it appeared that the US market was experiencing a spring rally on steroids," writes Kevin Grier, Senior Market Analyst, George Morris Centre.

This summer, the performing enhancement continued as US prices hit record levels. Figure 1 shows the US carcass price on a monthly basis for this year through August as well as last year and the previous five-year average.

Kevin Grier, Senior Market Analyst

"Unfortunately, once again, I did not see this coming. The main thing that I saw coming, however, was record hog and pork production. On a year-to-date basis through early September, US pork production is up over last year by nearly 9 per cent. During July and August, the year-over-year increase cooled a bit to just 6 per cent. Nevertheless, even with 'just' a 6 per cent increase, 2008 July and August prices were still 14 percent more than July and August 2007. Increasing pricing at the same time as increasing production is not supposed to happen," he said.

Figure 1. (Source: USDA Agricultural Marketing Service, AMS)

The Demand Factor

To find the explanation, once again we have to look to the intangible demand factor. It is called 'intangible' because demand can be forecasted with even less certainty than supply. Furthermore, it can only be measured after the fact. There are two basic components of demand: domestic and export.

Figure 2 shows an estimate of US pork domestic demand. The graph combines the US consumer price index for pork with the United States Department of Agriculture’s (USDA) estimate of pork consumption. Those two factors when multiplied together give an indication of the demand for pork. In addition to multiplying the price and the consumption, the multiplication product is indexed so that the first quarter of 2002 is equal to one.

Figure 2. (Source: US Bureau of Labor Statistics, USDA and George Morris Centre)

For the first half of 2008, pork demand was down compared to the first half of 2007. Third-quarter 2008 data is very preliminary as of now, but it appears that demand weakened again. As such, it is not possible to credit domestic US demand for the surge in hog pricing during the summer.

That leaves export demand as a possible explanation. In that regard, the picture in Figure 3 is worth a thousand words. US pork exports in June 2008 were more than two times greater than in June 2007. On a year-to-date basis for the first half of 2008, export tonnage amounted to 68 per cent more than in the first half of 2007.

Figure 3. (Source: USDA Economic Research Service)

In other words, US exports deserve most if not all the credit for the fact that prices have been very, very strong in the face of massive production volumes.

While US exports around the world have been good for Canada, it is no secret that US exports have also been rapidly moving into Canada. Over the past year, Canada has been the fourth largest customer for US pork, behind Japan, Mexico and China. Furthermore, while US exports to Canada increase, Canadian exports to the US have been on a downward trail. Figure 4 shows Canadian pork trade with the US

Figure 4. (Source: USDA Economic Research Service)

It is reasonably certain that the best that can be said for domestic US demand is that it will stay steady. That is easy to say because US pork demand, like Canadian demand, has generally been steady for the past 20 years. On the export front, predicting volumes and values is a much less certain task. USDA is boldly predicting that pork exports will continue to be very strong with fourth quarter volumes exceeding 2007 volumes by 62 per cent. At the very least, it is reasonable to assert that export market conditions remain favourable and that the export channels are open for growth.

With regards to supplies, the USDA’s June Hogs and Pigs Report provided the guideposts for expected slaughter for the fourth quarter as well as for the first and second quarters of 2009. Figure 5 shows quarterly slaughter in the US as well as forecasted slaughter from the third quarter 2008 through the second quarter 2009.

Figure 5.

The peak line on the graph is the forecasted slaughter for the fourth quarter of 2008. That once again easily represents a record kill volume. The first and second quarters of 2009, however, are likely to be the first time in 10 quarters that there was not a year-over-year increase in slaughter. In fact, with the ongoing decline in Canadian live hog shipments to the US in combination with the expected decrease in farrowings, hog slaughter could be down in the US by 4 per cent in the second quarter of 2009.

US Price Forecast

With that information regarding supply and demand expectations, the following are the pricing forecasts and the percentage year-over-year change for the fourth quarter 2008 through the second quarter of 2009.

Fourth quarter 2008: $66/cwt (+24 per cent)
First quarter 2009: $76/cwt (+42 per cent)
Second quarter 2009: $86/cwt (+22 per cent)

Alberta Hog Markets

Statistics Canada released its second quarter inventory report during the summer and it showed a continued erosion in the Canadian herd. As of June, the Canadian sow herd had declined another 5 per cent compared to June 2007. The herd has declined by 8 per cent from the largest second quarter tally during 2004. Meanwhile, the western sow herd, which includes British Comumbia, has dropped only 5 percent since the peak in 2004. Interestingly though, most of that decline has occurred in the last year. More concerning for Alberta, however, is the fact that the Alberta sow herd is down by 8 percent compared to the second quarter last year and by 15 percent from the peak year in 2004. Figure 6 shows Alberta sow numbers on a quarterly basis from 1999 through the second quarter of 2008. It also shows Alberta’s share of the western herd. As can be seen, not only has that province's absolute numbers been declining but so too has its share. In late 1999, Alberta' share of the western sow herd was 33 per cent. As of mid-2008, the share had declined to just one-quarter of the western herd.

Figure 6. (Source: Statistics Canada)

The Alberta packing industry, in particular Olymel, appears to have been slowly adapting to the new realities of hog numbers in Alberta. Figure 7 shows weekly slaughter levels in the province from 2005 through August 2008. It saw weekly kills in the 70,000-head range in 2006 when Olymel was on a double shift. When that ended, the province became attuned to kill levels in the 60-65,000 head range. Now going forward, it appears that 50-55,000 head is going to be more realistic. Unlike the past when the challenge was labour, going forward the issue is hog numbers.

Figure 7. (Source: Agriculture and Agri-Food Canada Red Meat Section)

Alberta Price Forecasts

Based on the US forecasts and expected pricing arrangements, the following are the Alberta forecasts for the fourth quarter and the first half of 2009.

Fourth quarter 2008: $120-125/ckg (+34 percent)
First quarter 2009: $140-145/ckg (+13 percent)
Second quarter 2009: $160-165/ckg (+21 percent)