Hog Prices Rally

Iowa barrow and gilt prices averaged near $72.50 (carcass weight) during July, up nearly 6% compared to July 2000. The strength in hog prices has been a pleasant surprise for hog producers as prices have been higher than expected following release of the June Hogs and Pigs report. Hog price strength was the result of smaller than expected slaughter, tight cold storage stocks, and strong demand for pork wholesale cuts, especially pork bellies.




Federally inspected hog slaughter during the first five weeks of the July-September quarter averaged 2.4% below a year ago. This is in contrast to a forecasted slaughter increase, following release of the June Hogs and Pigs report, of about 1%. The discrepancy indicates that the winter pig crop was overestimated by USDA, even though USDA revised its pig crop estimate downward on the June report. This summer's apparent slaughter shortfall could also be an indication that early fall slaughter will be smaller than originally forecast.

Expansion Underway

But the latest monthly Hogs and Pigs report suggests the slaughter slowdown could be short lived as it indicated the June pig crop was 2.7% larger than a year ago. The year-to-year increase in the pig crop occurred because sow farrowings increased 1.3% and the number of pigs per litter increased a whopping 1.5%. Many people in the trade are skeptical that the number of pigs per litter actually increased as much as the report indicates and it could easily get revised downward on a future report, but odds favor slaughter levels increasing as time goes on.

Although slaughter this summer has been smaller than expected, it looks like herd expansion is taking place. For example, sow slaughter as a percentage of total hog slaughter has declined significantly since early in 2001. During the first quarter, sow slaughter averaged 6.8% of total hog slaughter. During the April-June quarter, sow slaughter was just 1.2% of total hog slaughter.

Heavier Hog Weights Ahead

Pork production later this year and next is also likely to receive a boost from another factor besides hog slaughter. Hog weights have been increasing for a long time as the industry adopts improved genetics and feeding regimens which make it possible to feed hogs to heavier weights without adding excessive fat to carcasses.


This year has been no exception as dressed hog weights during the first half of 2001 averaged 196 pounds vs. 195 pounds a year ago, a 0.5% increase. But the introduction of Paylean by Elanco could exacerbate the trend to slaughter hogs at even heavier weights. At this point it's not clear how quickly Paylean will be adopted by the industry, but it could start to impact hog weights as early as the fourth quarter of this year and almost assuredly will provide a boost to hog weights in 2002.

Consider that during fall 2000 dressed hog weights averaged 196 pounds. This year, with moderate adoption of Paylean and barring a further run-up in corn prices from recent levels, dressed weights could approach 200 pounds, a 2% increase and the increases could be even larger next year.

Looking ahead to 2002, slaughter levels should consistently rise above the previous year's level. The year-to-year slaughter increase could be modest during the first quarter, but is expected to pick up speed during the April-June quarter. If weights increase significantly as seems likely, the result will be record large pork production during 2002.

Japan Imposes Safeguard On Pork Imports

The U.S. pork sector has benefited from a very positive trade balance during 2001. During the first 5 months of the year pork imports declined 13.5% compared to 2000 and total pork exports increased 32.6%. As a result, U.S. net pork exports increased 183%, compared to last year. FMD in Europe contributed to the reduction in imports and might have boosted pork exports, as well. For example, imports of pork from Denmark declined 64% during April and 74% during May.


Exports to principal pork customers have been strong across the board. During January-May, exports to Mexico (+28%), Japan (+38%), and Canada (49%) were all much larger than last year. But in late July, Japan's import safeguard was triggered, effective August 1, 2001.

Japan's import safeguard is operative when cumulative pork imports, measured quarterly, exceed the average imports of the three previous years by 19%. The safeguard raises the pork import gate price by about 25%. Effectively, it raises the price of imported pork to Japanese consumers and, thereby discourages consumption of imported pork. Now that the safeguard has been triggered, the higher minimum import prices will remain in effect through March 31, 2002. As a result, U.S. pork export growth during the rest of the year and early next year is expected to be modest, at best, since export growth to Japan will be severely limited by imposition of the safeguard.

Consider Managing Price Risk

Given the prospects for larger pork production and a weakening trade balance in 2002, consideration should be given to taking advantage of the recent rally in lean hog futures by hedging a portion of late 2001 and 2002 pork production.

Futures Based Cash Price Forecasts

Futures prices, adjusted for basis expectations, are a source of continuously updated cash price forecasts. As an example, Western Corn Belt 51-52% lean barrow and gilt price forecasts based upon futures prices at the time of this writing (8/3/01 settlement prices) adjusted for basis expectations are included in a graphical format. Basis forecasts are based upon the most recent three-year average basis for 51-52% lean barrows and gilts. To provide some indication of the amount of risk present, forecasts based upon the most positive and negative basis of the last three years are also included.

Weekly updates (in graphical form) of these price forecasts are also available on the K-State Livestock & Meat Marketing Web Site (www.agecon.ksu.edu/livestock) in the weekly electronic publication entitled Hog Price & Supply Graphs.

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Information provided by KSU Livestock report. For more information visit the KSU Livestock website.
Reproduced with permission.