June 2001: Review of the U.S Hog Market

Our Monthly look at the trends in US Hog Market and what effect thes may have on future prices. Hog Price Strength Continues To Be A Bright Spot, Slaughter & Pork Production Larger Than Last Year, Expansion Slow To Materialize, Net Pork Exports Increase, Futures Based Cash Price Forecasts - Written by James Mintert, Kansas State University.
calendar icon 11 June 2001
clock icon 6 minute read
Recent hog prices have been above a year ago. Although the transition to Mandatory Price Reporting (MPR) makes comparisons with last year tenuous, Western Corn Belt prices during May averaged near $68 per cwt. (carcass weight), about 1% higher than during May 2000. During the same time period, USDA's estimated pork cutout value averaged $71.85, up 4.9% from a year ago.

Unfortunately, the Mandatory Price Reporting system continues to make it difficult to determine what price producers are receiving for the bulk of their hogs. For example, up until just recently USDA was publishing the range of prices paid for hogs in the Western Corn Belt market region, in addition to the weighted average price for hogs marketed in the same region. However, due to technical problems, USDA (at least temporarily) quit publishing the weighted average price leaving the report's reader to determine what price level within the $10.50 reported price range (June 6, 2001) was most representative of hogs sold that particular day. It's not clear how long it will be before USDA is able to resolve the problems that have precluded routine release of price information reported under MPR.

Slaughter & Pork Production Larger Than Last Year

Through the end of May, federally inspected hog slaughter during the second quarter was up 2.2% compared to a year ago. However, the bulk of the year-to-year slaughter increase occurred during April as May slaughter was near a year ago. Hog weights continue to run heavier than during 2000. Live hog weights during the spring quarter (through May) averaged 265 pounds, up 0.8% from a year ago. The combination of larger slaughter and heavier weights pushed pork production above the previous year. During April-May 2001 federally inspected pork production was about 3% larger than last year. So, pork production this spring has been very near that forecast following the release of USDA's March Hogs and Pigs report.

Expansion Slow To Materialize

USDA's most recent monthly Hogs & Pigs report, released in late May, indicates that despite the profitability experienced by most hog producers this year, only limited expansion is occurring. For example, the number of sows farrowing during April actually fell less than 1%, and the April pig crop was up less than 1%, both compared to the year ago level.

Looking ahead, summer quarter slaughter is still expected to increase modestly compared to last year, perhaps by about 2%. Heavier marketing weights mean pork production will be approximately 3% larger than during summer 2000. And pork production this fall is also likely to be 3 to 4% larger than during fall 2000, since it looks likely that this spring's pig crop will increase very modestly, as indicated on the March Hogs and Pigs report.

Net Pork Exports Increase

Imports of pork into the U.S. started the year near a year ago, but then fell below last year during February. Restrictions on pork imports into the U.S. led to an even larger year-to-year decline in pork imports during March as pork imports declined nearly 13% below a year ago. As a result, pork imports during the first quarter of 2001 were 8% smaller than 2000's.

At the same time pork imports were declining, pork exports were increasing. Total pork exports during the first quarter increased 20% compared to 2000. Exports to all principal importers of U.S. pork were up including Japan (+30%), Canada (+33%), and Mexico (+28%). As a result of the increase in pork exports, and the decline in pork imports, U.S. net pork exports (exports minus imports) rose nearly 5% during the first quarter of 2001 compared to 2000.

Some of the reduction in pork imports was attributable to restrictions on pork imports into the U.S. from the EU related to the hoof and mouth disease crisis. For example, during March pork imports from Denmark (-32%) and the Netherlands (-9.7%) both declined. Additionally, it's likely that some of the increase in pork exports was also related to disease problems in the EU as some importers opted to replace pork imports from the EU with pork obtained from the U.S.

While pork imports were declining, live hog imports were increasing. Hog imports from Canada during the January-March quarter totaled 1.23 million head, a 26% increase above a year ago. Approximately 40% of the increase in live hog imports was attributable to increases in feeder pig imports slated for finishing in the U.S. Canadian packing plant and hog finishing capacity increases were expected to slow the growth in hog exports from Canada into the U.S., but that has not been the case. It's not clear how much longer the increases in hog exports can continue, given that the Canadian hog herd is not expanding appreciably.

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 (6/7/01 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.

Lean hog futures prices have rallied appreciably the last two weeks, but are still below the peaks established in late March and early April. Current futures prices indicate Western Corn Belt cash prices (carcass weight) are likely to trade primarily in the mid-$60's during July and August, then dip into the upper $50's during September. Futures traders expect the decline to continue throughout the fall, dropping all the way to the mid-$40's in December before starting to recover after the first of the year to the low $50's, where they are likely to remain until rallying seasonally next spring. Cash price forecasts based on current futures prices are consistent with expected market fundamentals. However, if futures rally and approach the early spring price peaks, consideration should be given to hedging a portion of future production.

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