John Lawrences' Commentary: Hog Expansion

US - The USDA released the December Hogs and Pigs Report December 28 with its estimate of December 1 inventories. As expected the report indicated that US producers are slowly expanding the herd with a 0.3% increase in the number of market hogs and a 0.7% increase in the breeding herd compared to December 2004 (Table 1).
calendar icon 4 January 2006
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The estimated inventory was very close to the pre-report guesses by trade analysis that were already factored into the market.

The increased inventory will put downward pressure on farm level prices, but is not expected to significantly change the outlook for 2006. Based on this report and relatively stable demand, the first three quarters of 2006 are expected to be profitable for Iowa’s rank and file pork producers. The forecast is for fourth quarter prices to be at or below breakeven.

Table 1: Summary of USDA December 2005 Hogs and Pigs Report

Additional supply factors include a continued increase in carcass weights and pigs per litter. The 20 year trend is for a 1-2% increase in each annually. The additional finishing facilities built in the Midwest in 2005 will allow for additional pigs per litter and additional days on feed if needed to increase weights. Another supply factor to watch this year is the potential for increased Canadian pig imports. Imports of Canadian feeder pigs and weaned pigs were lower in 2005 compared to 2004.

However, the Canadian government imposed a duty of $1.65 US / bushel on US corn imported into Canada which will increase the cost of finishing pigs in Canada. The higher Canadian feeding costs will make exporting the pigs to the US more attractive. This ruling may be overturned as it works its way through the International Trade Commission. In 2003 a duty was placed on hogs and pigs coming from Canada to the US, but it was overturned in 2004.

Pork Demand, the Big Unknown...

The big unknown in the price outlook is pork demand. Demand for pork was very strong in late 2003 and 2004 with some quarters posting an increase in supply AND an increase in price at the same time. For the year of 2004, per capita pork consumption decreased 1% and Iowa farm level prices increased 33%, an approximately ten times bigger impact than was expected.

However, it appears that 2005 is returning to reality. Preliminary data indicates that per capita pork consumption decreased 2.9% and prices also fell 4%. The question is what will happen to demand in 2006. Unlike supplies that can be tracked from inventories and biology, demand is difficult to predict. Economists generally believe that demand is a function of the number of consumers, the price of substitutes, consumer income, and consumer preferences.

While total supplies are expected to increase, per capita domestic consumption may increase only slightly thanks to continued strength in pork exports. Supplies of competing meats are expected to be close to 2005 levels setting up a supply scenario similar to 2005 but with slightly more pork.

As mentioned, exports are expected to increase in 2006, but perhaps not at the 25% growth rate seen in 2004-05 due in part to expansion of beef exports. That leaves consumer income and their preferences. Consumer income has been impacted by rising energy prices. Gasoline is down from its $3/gallon peak early in the fall, but appears to have settled in the $2/gallon range compared to $1.79/gallon national average a year ago. Home heating cost estimates are expected to be 25-40% higher than last winter. This increased pressure on consumer spending will likely impact their purchasing decisions including for food. Higher priced and away-from-home food will likely be impacted more than the lower priced and at-home meals. Thus, bacon cheeseburgers may be replaced with ham sandwiches or a pork loin roast may be replaced with pepperoni pizza.

Most analysts credit the low-carb trend with supporting demand in 2003 and 2004. Indicators suggest that while protein consumption is higher than before the low-carb craze, the rate of growth of new high protein dieters has slowed and perhaps even declined. Thus, pork demand, while still above its pre-2003 levels, will likely be below its 2003-04 level in the year ahead. Because it is difficult to predict, the market may have trouble anticipating weaker demand. Add in larger and expanding pork supplies and 2006 looks like a year to be more aggressive on locking in prices.

Further Information

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Source: John Lawrence, Iowa Farm Outlook - 3rd January 2006

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