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

U.S. slaughter last week was 1.908 million head and fell short of year ago's 2.029 million head by:

• Over 120,000 head.
• 6%.

A 6% drop in year-over-year weekly slaughter is a huge shortfall. Since mid-July we've been expecting year-over-year weekly slaughter to be lower, the consequence of a smaller breeding herd and smaller pig crops.Now, we are beginning to see that expectation become reality.

We are not the only ones believing fewer hogs year over year is upon us. You need look no further than October lean hog futures. They were at $54.77 on the close Friday even while Friday's average national lean cash price was $48.34. Counter cyclically, October lean hogs are at a 6-cent premium to cash. The only time October hog prices are higher than August's is when the effects of a breeding herd liquidation is lowering seasonal supply.

When we look at hog supply and consider the excess weekly market hogs being pushed to the U.S. from Canada due to mad cow, we are positive that U.S. monthly hog slaughter totals will be lower each month vs year ago for the next 12 months. Cash hog prices will be higher because of this.

Weather

Until the last 2 weeks, temperatures in most hog producing areas were lower than most summers. This observation is collaborated by estimates last week that the corn crop is 10 days behind normal, a reflection of having had lower heat units. Heat units as an element of corn crop progress is as good a measure as we have. It also reflects the heat conditions affecting swine. The point is, lower heat units this year are a good indication that hog growing conditions have been better than normal. Hogs are not backed up. We believe the supply is current.

Liquidation

Seen any sow units under construction? You need to look far and wide in both the U.S and Canada. Not only is sow slaughter running at 62-64,000/week, there is little chance of significant gilt retention going into new units. The desire and ability to raise capital to build new units is handicapped by the financial losses that have occurred over the last 2 years.

Bullish

U.S. cattle prices hit record highs last week. Cattle producers are benefiting from increased demand and lower beef production. It doesn't get any better than that. We are optimistic a spill over effect will aid pork prices in the coming months as retailers and food service operations focus on featuring pork (the other red meat) as a great value compared to beef prices. Why wouldn't they?

This will push pork demand at the same time supply is diminished by the reality of fewer hogs coming to market and lower pork production. More demand and fewer hogs will aid hog prices. There's not much to prevent this from happening. There is no way a breeding herd that continues to liquidate will be able to maintain past production levels.

Is the stage set for something big? We have talked in the last few months of the five 30-year price cycles the U.S. livestock industry has experienced in the last 150 years. In 30-year cycles, livestock prices always surged. The last time was 1973, 30 years ago.

Cattle prices, now at 85 cents, are the highest in history. Moreover, beef supply will stay limited for months ahead. Last fall there was expectation of lower slaughter cattle numbers but when exactly it would occur was the big question. Then, in November last year beef supply dropped relative to year earlier and has stayed there. Before the supply drop last year, cattle last October were 64 cents/lb. Last week they were 85 cents/lb. The difference on a 1250-lb steer amounts to $250. At a U.S. weekly slaughter rate of 700,000, this difference changes cattle producers' weekly cash flow by +$150 million---new pick-ups for everyone!

The future: Pork production will be down. Beef production is down. The last time both pork and beef production were concurrently lower was 1973. So, will this be the Big One.....that 30-year price surge? Even if it's not, we expect the pork industry to receive a positive cash flow boost from both the beef and pork supply being down at the same time. It's long overdue.

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Source: Jim Long, www.baconmaker.com. Reproduced courtesy Farms.com - 1st September 2003