John Lawrence

Few pork producers will ever forget December 1998 when hog prices dipped below $10/cwt and averaged below $15/cwt for the month. One of the main reasons for the extremely low prices was the lack of packer capacity to slaughter and process the number of hogs on the market. The market hit a packer capacity constraint as most plants were operating double shifts, Saturdays, and in some cases Sunday. While no one is predicting a repeat of 1998, there are several factors and analysts pointing to potential problems this fall. We will first look that expected packer capacity and hog supplies. Then we will look at risk factors that may cause capacity to be an issue.

Expected Packer Capacity

In 2006 the largest daily slaughter was slightly over 428,000 head and the largest weekly slaughter was 2.24 million head. However, since that time a double shift plant in Mississippi closed, as did one shift of a plant in Sioux City, reducing daily capacity approximately 20,000 head. Other plants have added capacity and it is now estimated that daily capacity is nearly 425,000 head (estimated by Steve Meyer, Paragon Economics). That will put the five-day total at 2.125 million. Saturday operations will be an essential factor for slaughter capacity. While a “large” Saturday kill for fall is 120,000, the Saturday of Thanksgiving week in 2006 was nearly 400,000. Thus, a potential weekly kill may be near 2.5 million head, but a more typical week is closer to 2.25 million head.

Expected Hog Supplies

Based on the June Hogs & Pigs report there is expected to be approximately 1.2% more hogs for slaughter this fall. Using this increase there will be only three weeks near the 2.25 million weekly slaughter (Blue x-line in Figure 1).

Weekly Commercial Hog Slaughter

One of the justifications for hog slaughter in 2006 being lower than expected was Circovirus that caused higher than normal deathloss in finishing barns. There is now a widely used effective vaccine that reduces deathloss. As such, the change in hog supplies may increase more than indicated from the Hogs & Pigs report.

Year-to-day through early August slaughter hog imports from Canada were up 16% from the same period in 2006. On August 30, Maple Leaf Foods announced that it will close a hog slaughter plant in Winnipeg, Manitoba due in part to labor issues. This is the second Maple Leaf plant closed this year. Maple Leaf has announced plans to shift production to their Brandon, MB plant by 2009. However, for this fall and 2008, more hogs are expected to be exported to the US for slaughter.

Figure 1 has a line (Black triangles) that is 2% higher than the slaughter predicted by the Hogs & Pigs report, to reflect more hogs from the use of Circovirus vaccine and exports from Canada. If this scenario occurs, weekly slaughter could exceed 2.25 million head six or more weeks in the fourth quarter, but doesn’t reach 2.4 million head. If there is a larger “vaccine” effect or hog imports are larger, there will be considerable pressure on prices.

Other Risk Factors

While packer capacity is an issue to watch, as it could significantly impact prices, there are other factors that could impact hog prices this fall.

Carcass weights, which had been lower than the year before through much of 2006 and the first half of 2007, have started to increase. While higher corn prices can explain lower weights in the fall and winter, they don’t explain lower weights last summer. It is possible that the weight decrease was related to Circovirus that is now corrected by vaccine. Weights began posting year-over-year increases in July and are expected to continue higher through the remainder of 2007.

Pork exports have set new record levels in each of the last 15 years and in 2006 accounted for nearly 15% of US pork production. However, through the first six months of 2007 exports are lower than the year earlier. The decline is explained by decreases to Mexico, our second largest market, as other leading markets were steady to higher. There has been a lot of emphasis and bullishness on potential exports to China. Pork exports to Mainland China and Hong Kong were up 24% from the year before through June, but the expectations are for significantly larger exports to China later this year. It appears that these potential exports are already bid into the futures market. If the exports materialize, it is doubtful that there is much upside price potential. If the exports do occur, but are less than expected, then prices will be weaker.

Poultry supplies are increasing from the year before. In 2006, broiler producers were in significant red ink and began cutting chick placements in the fall of the year. As a result, supplies fell and broiler prices increased sharply to profitable levels. Broiler producers are now ramping up production. The higher poultry production will compete with pork at the retail meat counter.

Summary

Packer capacity will be tight this fall and pork supplies will be larger than last year. Weaker exports and cheaper competing meats will limit demand and more hogs at heavier weights will increase supply. In late August, December futures were trending higher at over $69 (carcass weight basis). Even with a typical basis, the farm level prices would average in the upper $60s and live hog prices over $50/cwt live weight. These prices should offer breakeven price protection for most producers.

September 2007