US Breeding Herd Still Declining

Jim Long President, Baconmaker Genetics / Wood Lynn Farms, Inc.

Breeding Herd

USDA's breeding herd inventory estimate this June 1 is 5.940 million.

• It's the lowest breeding herd inventory in modern times.
• It's down approximately 270,000 head vs year ago and 4.5% smaller than year ago.
• Over the last year the U.S. has liquidated an average of 5,200 breeding animals/week, the equivalent of a 1000-sow unit going out of production each business day all year long.

We are surprised the U.S. breeding herd did not decline further than it did since March 1st, considering sow slaughter from Jan-May in 2003 has been greater than during the same period of 2002.

With sow slaughter running 65,000/week and summer heat (mortality) beginning, there is no indication the breeding herd has stopped contracting. Historically, the breeding herd increases from March 1 to June 1.

The Basic Facts

Market Hogs

The total market inventory on June 1 was 2.5% smaller than a year ago. This June's market inventory was quite similar to June 2000 and 2001, both years when hog prices were profitable through the summer and early fall.

The weight break down of market hogs indicated there was only half of 1% fewer market hogs over 180 lbs this June 1 vs last. These would be hogs being marketed from the 1st of June to the first part of July. Actual slaughter has run slightly under USDA's projection. In the first 4 weeks since June 1 market numbers have been 7.265 million vs 7.327 million a year ago, down 1.5%---quite close to USDA projections of half a percent less.

The real positive aspect on supply, if USDA inventory estimates are correct, is that during mid July we will be marketing from weight categories USDA has estimated are even smaller year-over-year than the 180-plus lb pigs we have already worked through.

• This June 1's inventory of 120 to 179 lbs is 2% smaller than year ago's.
• This June 1's inventory of 60 to 119 lbs is 3.5% smaller than year ago's.
• This June 1's inventory of under 60 lbs is 3% smaller than year ago's.

These inventory numbers are similar to 2000 and 2001 supply levels. Then, producers made significant profits. Now, after 18 months of losing $15-$20/hd, the industry needs this reprieve.

Pig Crop

• This year's March-May pig crop is 3.5% smaller than a year ago. This amounts to approximately 900,000 fewer pigs overall and 70,000 fewer pigs/week. Having a slaughter that could be 70,000 hd/week lower this fall will do wonders for prices.
• The March-May pig crop is 3.5% smaller than last year from a sow herd that was 4.5% smaller (on June 1) than last year. In our opinion, this is logical---4.5% fewer sows produce 3.5% fewer pigs. Historically, productivity gains are 1%/year. It all falls together.
• USDA projects farrowing intentions to be 2% less in the third quarter and only 1% less in the fourth quarter. Having been in swine production as long as we have, we know farrowing intentions are a combination of goals, dreams and wishful thinking. There's plenty of all this but little reality in these farrowing intentions. There's no way a breeding herd that's 4.5% smaller on June 1 is going to farrow only 2% fewer pigs. The 4th quarter's intentions of only 1% less is even more ridiculous. We predict that the 3rd quarter's pig crop will be 3-5% smaller than a year ago.

Conclusion

The breeding herd is at a historical low and still declining. The market inventory is at levels similar to 2000-2001, both profitable years for hog production. In our opinion, farrowings will be significantly lower the next 2 quarters than last year. The industry has suffered from negative margins for too long. Since 1998 the average farrow-to-finish operator has lost $8/hd. The total loss to the industry is probably $10 billion in cash and asset devaluation. It's been miserable and the pressures on owners of hogs has been tremendous as they had to deal with the financial challenges and collateral damage (family, societal and self esteem).

The industry needs a financial reprieve and the good news is the hog inventory levels are such to guarantee profitable hogs for the next 12 months and beyond.

Mad Cow

We believed at the beginning of the Canadian mad cow (BSE) crisis that beef and cattle exports to the U.S. would be stopped for a minimum of 90 to 120 days (it's now 40 days). Last week, Japan's insistence on beef identification from the U.S. until September 1 gives U.S. Ag Secretary Veneman cover to keep the border closed. It was never going to be opened earlier, in our opinion, but keeping it closed now will be easier because it can be blamed on the Japanese.

Meanwhile in Canada, beef producers are getting $500/hd less for their cattle while, at this point, there is no appreciable decline in beef prices in retail stores. Got to love those retailers! They know how to step up to a crisis and step up their own bottom line.

One thing is for sure: Our theory that it is a continental marketplace is shaken. One cow, one herd, on one farm has cost the Canadian cattle industry an estimated $11 million/day, or near $500 million to date---and still counting. The border between Canada and the U.S. is not free. The longer it stays closed the greater the realization of vulnerability the Canadian hog industry has. It exports 45% of its production annually.

Commercial Note: We are looking for 100-to-200-sow farrow-to-finish operations for genetic R & D. If you are interested or want more details, give Jim Long a call at 1-800-667-5326.

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