Hogs/Pork

The Quarterly Hogs and Pigs report issued by the U.S. Department of Agriculture (USDA) on March 31 reported March 1 hog inventories and farrowing intentions that were largely anticipated, and consistent with USDA’s 2006 production forecasts. Strong exports in January and February contributed to a revised annual 2006 pork export forecast of 2.9 billion pounds, an increase of almost 9 percent over last year. The 2006 U.S. commercial pork production is expected to be about 21.3 billion pounds, 3 percent above 2005. An 11-percent increase in live swine imports will contribute to the production increase. Prices of 51-52 percent lean live equivalent hogs are expected to average between $42 and $44 per cwt this year.

Quarterly Hogs and Pigs Reports Small Increases

The USDA Quarterly Hogs and Pigs report issued on March 31
(http://usda.mannlib.cornell.edu/reports/nassr/livestock/php-bb/) reported March 1 hog inventories and farrowing intentions that were largely anticipated and consistent with USDA’s 2006 production forecasts. March 1 inventories of all hogs and pigs, as well as animals kept for breeding increased by 1 percent over March 1, 2005 levels.

Roughly the same number of sows farrowed in December-February as in the first quarters of 2005 and 2004. The pig crop that resulted in Dec.-Feb. 2006, however, yielded the largest ever litter rate for the quarter--9.03 pigs per litter. U.S. commercial pork production this year is expected to be about 21.3 billion pounds, 3 percent above 2005.

Pork Production Increases on Stable Breeding Herds?

The combination of a largely static breeding herd, increasing litter rates, and higher pork production together reflect the evolved U.S. pork industry structure that is able to increase production by means other than expanding breeding herd numbers. Since 2003 the U.S. breeding herd has averaged about 6 million head. But over the last 3 years in particular, the industry has managed to make average additions of more than 450 million pounds per year to U.S. commercial pork production. Production increases are coming primarily from three sources: animal production efficiencies reflected in higher litter rates, increasing specialization of U.S. swine production to the finishing phase, that corresponds with larger U.S. imports of Canadian feeder animals, and thirdly, from increases in slaughter weights that follow from relatively low prices of corn and soybeans.

Quarterly U.S. litter rates are graphed in the figure below, at 5-year intervals, beginning in 1995. The figure also shows the first quarter 2006 litter rate reported in the March Quarterly Hogs and Pigs report. The 9.03 pigs per litter rate suggests a continuation of the dramatic series of efficiency improvements registered by the U.S. pork industry. Efficiency gains, such as higher pigs per litter, enable the industry to increase pork production even when breeding herd numbers change very little. Litter rate increases are one outcome of the structural changes in the U.S. pork industry that have taken place over the past 15 to 20 years. For more information on these changes, see “Economic and Structural Relationships in U.S. Hog Production” (http://www.ers.usda.gov/Publications/aer818/).

U.S. Live Swine Imports Likely To Increase Further in 2006

Imports of live swine--feeder pigs and slaughter hogs--are another important source of U.S. pork production increases. Since 1995, swine imports have more than quadrupled, from less than 2 million, to more than 8 million head last year. More than 99 percent of all U.S. swine imports come from Canada. Since 1999, more than half of Canadian swine imports have been feeder pigs--animals weighing less than 50 pounds. In 2005 feeder pigs made up 66 percent of U.S. swine imports. Most feeder pigs are imported by U.S. finishers in the Iowa-Southern Minnesota area, where access to feed supplies and packer\processors are both cost optimal.

Canada Specializing in Farrowing, the United States in Finishing

The Canadian breeding herd is highly productive; in fact the figure below shows that Canadian litter rates continue to exceed U.S. rates by a significant margin. Many factors contribute to Canadian productivity, but favorable climatic conditions and relatively thin population densities are among the most important. The climate in Canada--particularly in Manitoba where a large part of the feeder pig industry is located-- tends to be cooler and drier than in the United States.

Such climatic conditions help to reduce disease problems. Also, population densities tend to be much lower in Canada--and dramatically so in the Prairie Provinces--which allow farrowing operations to be situated huge distances from other operations. The relative isolation of hog operations also works against the establishment and spread of disease. Fewer disease problems that the favorable climate and low population density help to bring about, result in superior litter rates that can translate into lower average production costs for Canadian feeder pig operations. The potential for lower costs and enhanced animal health create incentives for U.S. finishers to import Canadian feeder pigs.

2006 Swine Imports Are Expected To Increase More Than 11 Percent Over Last Year

U.S. hog finishers and packers\processors are expected to import 9.1 million head of swine from Canada in 2006, an increase of more than 11 percent over last year. The increase is attributable to several factors, but among the most important is the assumption of continued imposition of dumping penalties\countervailing duties on imported U.S. corn made permanent by the Government of Canada (GOC). Temporary penalties\duties of $1.65 per bushel on imported U.S. corn were imposed by the GOC in December. The Canadian International Trade Tribunal is expected to make its final ruling on the penalties\duties on April 18, 2006. Making the duties permanent would create significant disincentives to finish and slaughter livestock in Canada, because feed costs would increase to reflect the penalties\duties. Canadian producers would likely respond to higher feed costs by increasing the number of feeder pigs shipped to the United States.

The USDA forecast for 2006 live swine assumes that the GOC-imposed penalties\duties on imported U.S. corn remain in place for 2006. But even in the absence of the penalties\duties, there are some outstanding questions regarding incentives for producing finished hogs in Canada, especially in Ontario, the United States’ second largest source of imported feeder pigs. Recent net returns calculated by the Ontario Ministry of Agriculture, Food, and Rural Affairs
(http://www.omafra.gov.on.ca/english/livestock/swine/finmark.html), and summarized in the table below, are mixed at best for Ontario operations other than farrow-to-wean operations. Canadian farrow-to-wean operations are typically export-oriented operations specialized in production of pigs weaned at a very early age-- less than 3 weeks, and weighting about 10 pounds. Most of these pigs are exported to the United States for finishing.

Moreover, the spread between U.S. and Ontario hog prices has been declining in recent years, meaning that Canadian packers are paying less and less for hogs, compared with what U.S. hog producers receive from U.S. packer\processors. The spread between Ontario and U.S. hog prices could be narrowing for a number of reasons. Clearly the appreciating value of the Canadian dollar is making Canadian pork products more expensive--and thus less competitive--on world markets.

When Canadian products don’t achieve full “asking price” on world markets, either fewer Canadian products are sold, and\or, the asking price of Canadian pork must be lowered. Either way, Canadian packer\processors reduce offer prices for hogs. A declining spread between Ontario and U.S. hog prices also raises questions about the competitiveness of the Canadian slaughter industry. It is very likely that slaughter costs are higher in Canada than in the United States. The sources of possible U.S. packer\processor competitiveness are readily identifiable. U.S. slaughter plants tend to be much larger than Canadian plants.

Larger plants can often achieve significant scale economies which can contribute to lowering slaughter costs. U.S. plants also drive costs lower by double-shifting plants. Only one slaughter plant in Canada runs a double shift with any regularity. Lower U.S. slaughter costs often allow packer\processors to pay higher prices for hogs than higher cost competitors. The competitiveness of the U.S. slaughter industry, together with the appreciating Canadian dollar will likely continue to drive the Ontario-U.S. price spread lower, thus creating additional incentives to export swine to the United States.

Hog Prices, Wholesale Pork Prices Lower in March, First Quarter

Prices for 51-52 percent lean hogs (live equivalent) averaged to $43.34 in March and $42.63 for the first quarter. Although first-quarter hog prices were almost 18 percent below a year ago, USDA calculations show break-even prices currently in the mid-to-high $30 per cwt range. Most U.S. producers are likely continuing to achieve positive returns.
(http://www.ers.usda.gov/publications/ldp/xlstables/productionind_estreturns.xls). Hog prices for 2006 are expected to average between $42 and $44 per cwt. Recent increases in corn prices are not currently expected to significantly increase hog producers’ costs of production in 2006.

Wholesale and Retail Prices Also Lower

The USDA Estimated Pork Carcass cutout--an indicator of wholesale pork values-- in the first quarter averaged $61.76 per cwt, almost 16 percent lower than firstquarter 2005. Lower carcass cutout values are partially attributable to large firstquarter commercial hog slaughters and hefty dressed weights, which are expected to average 203 pounds, averaged almost 2 pounds heavier than a year ago. While very strong foreign demand for U.S. pork products undoubtedly supported the first quarter cutout, it also seems likely that retail poultry prices are cutting into domestic pork demand, and pressuring wholesale pork values. First-quarter retail pork prices are expected to average in the high $2.70s, or about 2 percent lower than a year ago.

Exports Continue To Bolster U.S. Pork Demand

U.S. exporters shipped 254 million pounds of pork to foreign markets in February, an increase of more than 23 percent over February 2005. For the first 2 months of 2006, U.S. export data indicate that U.S. exporters have shipped almost 22 percent more pork to foreign markets. On the basis of very strong January and February exports, USDA increased its 2006 pork export forecast to 2.9 billion pounds, almost 9 percent larger than exports in 2005. Very strong exports are likely being driven by favorable exchange rates, and by the fact that U.S. pork is one of the remaining animal proteins not touched by disease related issues, as with beef and BSE (i.e., outbreaks in North America), and, poultry and AI (i.e., outbreaks in Asia, Africa, and Europe). As a consequence, demand for U.S. pork products is sizzling in almost all markets. Export data available for January and February 2006 indicate the following year-over-year changes.

The small reduction in exports to Japan is not unexpected, as data indicate that pork stocks in Japan remain relatively high. (http://www.ams.usda.gov/lsmnpubs/japan.htm) Japan remains, by far, the largest destination for exported U.S. pork. So far this year, Japan accounts for 31 percent of U.S. exports. Over the same time last year, almost 41 percent of U.S. exports were shipped to Japan.

Links

For more information view the full Livestock, Dairy and Poultry Outlook - April 2006 (pdf)

Source: Livestock, Dairy and Poultry Outlook - U.S. Department of Agriculture, Economic Research Service - April 2006