Market Preview: Lessons from Mandatory Price Reporting

US - Weekly U.S. Market Preview w/e 28th July, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 29 July 2006
clock icon 5 minute read

Sow slaughter has been higher this year than last in 17 of the 20 weeks, since the first full week of March. Over that time period, sow slaughter has been 5.5% larger in raw numbers and 4.1% larger as a percentage of the breeding herd. Roughly 65,000 more sows have been slaughtered during that time period vs. 2005 -- over 1% of the U.S. breeding herd.

And it's not the Canadians. They have shipped about 6,500 fewer cull breeding animals south during this period.

At the time, I thought the best explanation was depops/repops, but I'm not so sure now. First, this has gone on for a long time and I can find no one who thinks the need or desire to repopulate is widespread.

We also mentioned that some of these may not be health-related depop-repops, but ones aimed at upgrading genetics now while cash is available. That would be a good idea except for the fact that gilt slaughter rates have been above the level needed to leave a sufficient number of gilts available to replace the sows. Figure 2 shows the computed sow loss and gilt replacement number from the University of Missouri, and there has been a shortfall in recent weeks.

I believe it is unlikely that the sow slaughter data is very wrong since sows mainly get slaughtered in sow-specific plants and, thus, can't easily be counted incorrectly. There could perhaps be a little slippage for light sows slaughtered in top hog plants, but that slippage would result in sows being counted as market hogs and push the data the wrong direction.

Yes, the gilt data could be wrong. However, that is one reason the Missouri researchers use a four-week moving average. Their thought is that individual weeks may bounce around but, over time, the series will do pretty well. I agree.

Finally, it is always possible we are reducing the sow herd, but I give that about a zero probability as well. Thirty straight months of profits, higher-than-expected cash and futures prices and, as of Friday's USDA Crop Production report, an 11 billion-bushel corn crop all make that prospect very unlikely.

That leaves us with one unknown variable -- death loss. The level of death loss on U.S. sow farms has been a point of controversy and discussion for some time. Producers had at one time been convinced that modern genetics and the need for generational turnover made 50-55% replacement rates -- that were largely driven by high death losses -- acceptable.

Heightened sensitivity to animal welfare and public image caused producers to eventually reject that proposition, and much has been done in the past five years to improve the survival rates of sows. Better gilt development, breeding at older ages, better attention to body condition, new genetic lines selected with longevity in mind, and a new-found appreciation for the economic importance of sow lifetime production have all driven breeders and producers to do a better job.

It is logical to conclude that at some point we would simply have more sows living long enough to capture salvage value for producers and provide a slaughter animal for sow processors. Given the lack of other explanations for high sow slaughter, perhaps that day is at hand.

If it is so, then congratulations! That's a job well done that benefits everyone, including the pigs.

Prior-Day vs. Slaughter Reports

One item of clarification probably needs to be added to the discussion week before last about the historical pattern of prices reported to USDA under the Mandatory Price Reporting System (see Commentary: July 28, 2006).

A further, and perhaps more important, reason that net prices from the prior-day purchase reports display more volatility than base prices from the prior-day slaughter report is that all packers are included in the net price data since they all slaughter hogs each day. That is not necessarily the case for the purchase data.

Figure 2 illustrates the point by comparing just the "base" prices from the prior day purchase and slaughter reports. On some days, packers that pay low base prices and high premiums are in the "purchase" report, while other packers are not. On other days, high-base/low-premium packers may be in the market. The fact that not every packer is in purchasing mode every day causes the prior-day purchase data to be quite volatile.

On the other hand, virtually every packer slaughters every day and, thus, the slaughter data represent a smoothing of purchasing philosophies. In addition, the slaughter-day data represent prices of animals purchased over several days. This blending smoothes data as well. It also causes the slaughter data base prices to lag the purchase data base price just slightly. See how the red line is just slightly to the right of the blue line?

If your contract is tied to the current- or prior-day purchase data, it matters who is in the market on the day you ship your hogs. If your contract is tied to prior-day slaughter data, that source of variation is largely removed.

© 2000 - 2024 - Global Ag Media. All Rights Reserved | No part of this site may be reproduced without permission.