Shane Ellis' Commentary: Hog Expansion Continues

US - US pork producers continue to build swine inventories. For the past six years, there has been a year over year increase in September total swine inventories, while the swine breeding herd has increased for the past three years.
calendar icon 20 September 2006
clock icon 8 minute read

Currently there are 62.7 million head of swine nationally, up 1.4 percent from a year ago. The swine breeding herd inventory numbered just over 6 million head, an increase of almost 2 percent since last September. Breeding herd numbers have been below 6 million head since 2002. Market hog inventories have increased 1.3 percent to over 56.6 million head.

Farrowings in the next quarter are expected to be up almost a percent in the coming quarter and then steady in the first quarter of next year. The US pig crop in the past six months was up more than a percent in the past six months. Table 1 contains a summary of the inventory numbers from the hog and pig report and the percentage change in each from a year ago.

Table 1. Summary of the Sept 2006 USDA Hog and
Pig Report Percent Changes from Year Previous

The pig crop in the most recent quarter was up on a national average, but in Iowa it did not change from a year ago. Iowa’s breeding herd also appears to be holding steady while the rest of the nation continues a steady increase in breeding herd numbers. Iowa farrowing intentions are up a percent in this quarter and down a percent in the winter months. Over all the industry seems to be taking a cautious approach in their farrowing intentions. Uncertainly over corn prices and the increased number of sows slaughtered are primary contributors to the lower than would be expected farrowing intentions in the next six months.

Market hog inventories have also increased in all weight classes. The number of hogs on the heavy side of the weight range, over 180 pounds, has increased 2.6 percent nationally and more than 3 percent in Iowa. More hogs are on feed because pig supplies have increased while hogs continue to be fed to a finish weight above the five year average.

The USDA also released the report, U.S. Hog Breeding Herd Structure, earlier this week. Although changes in the breeding swine herd are continually discussed by analysts, this report does deliver an overview of the changes in the past two years. This report notes that the productive efficiency of operations both above and below the 5000 head benchmark weaned more pigs per litter. This improved efficiency not only comes from a general improvement in production methods, but also a change in the number of smaller and usually less productive small operations. The number of hog operations with less than a hundred head has decreased by 19 percent since 2000 and 3.5 percent since 2004. The number of pigs produced per litter has again set a new record of 9.14 head for all producers and 9.2 head for larger operations with more than 5000 head.

Production and Prices

Pork supplies are expected to increase due to increased pig crops in the US and Canada. Importation of hogs, pigs, and pork from Canada is expected to increase. Table 2 contains the expected changes in US pork production, the forecasted ISU live hog price and basis adjusted futures hog prices for the next four quarters. Prices are expected to remain profitable into next year for most producers if corn prices do not escalate. The futures market also seems optimistic for continued profitable prices. Pork production is expected to increase in the fourth quarter of this year due to several reasons: more hog on the heavy side of the feeding period, a larger first quarter pig crop, and more imported of live Canadian pigs and hogs.

Table 2. Percent Change in Pork Production From Last Year, ISU Price Forecast

Figure 1 contains a graph of the US wholesale prices of pork, poultry, and beef. Pork prices in the past 12 months dropped and then rebounded by almost $13/cwt, while chicken values have not yet recovered from a similar decline. This has put a larger than usual spread between wholesale values of pork and chicken. Historic seasonality suggests that as the winter months approach demand for meat usually falls and pork values are expected to follow.

Consumers may not have noticed dramatic changes at the meat counter, as retail meat prices remain relatively constant. Retailers try to satisfy consumer demand for quantity while maintaining a constant profit trend. As meat sales increase, retailers pay higher wholesale prices for a limited supply of meat to satisfy the greater sale volumes. If the retailer profit margin per unit sold is narrowed, increased sales volume usually more than balances out the extra cost of product acquisition. Consumer preference between pork and poultry is not likely to be effected by changes in wholesale prices, because retail prices have remained relatively constant. Consumer perception of meat safety, quality and popular appeal tend to impact direct demand more quickly than wholesale value.

Earlier in the year, poultry sales and exports were hindered by concerns of bird flu, and poultry cold storage stockpiled surplus supplies, see Figure 2. That build up has since been utilized, and frozen chicken stocks are nearly equal to the levels of a year ago. Pork cold storage stocks in August were up only 0.6 percent from a year ago. Consumption, both domestic and foreign, has absorbed most of the increased pork production. This year’s Pork exports through the month of July were up 12.4 percent.

Poultry, primarily chicken, is the most competitive substitute for pork. Poultry production has in the past increased at a fairly constant rate. Figure 3 is a graph of the year to year percentage change in the rolling three week average egg sets and chick placements. Poultry production seems to be following its usual seasonality with a decline in late year egg sets and chick placements. In the past two years, three week average chick placements have been increasing, 2.7 percent in 2004 and 1.6 percent in 2005.

However, because of worldwide public concern over bird flu, demand was weakened, and producers have since reduced chick placements for the first time in recent years. With the prospect of less chicken being produced in the next quarter, there will be less competition with pork at the meat counter. If demand for poultry recovers in the coming months, pork prices could see some positive pressure from increasing chicken prices. For right now consumer preference will insulate the competition between the two “white” meats.

Canadian Situation

Feeder pig imports from Canada this year have been up 14.7 percent over the same period last year. However, this increase would have actually been larger if corn tariffs had remained. There was a four month period at the beginning of 2006 when a hefty $1.65/bu tariff was placed on US corn. Sixteen percent more feeder pigs were imported during the January to April period than during the same period in 2005. However in the past five months since that tariff was removed the number of feeder pig imports has been down 12 percent and slaughter hog imports have been up 9.5 percent from the same May to Sept period last year. Most of the feeder pigs that were imported earlier in the year have been processed or soon will be.

What are the Canadian swine industry’s intentions for the future then? Figure 4 is a graph of the percent change in sow farrowings and pig crop for 2004 to 2006. Farrowings were increasing until the last quarter of 2005. Farrowings have since remained level in 2006 but are expected to decrease in the last half of this year.

In summary, the US breeding herd continues to grow and market hog numbers have increased from additional pigs produced and imported. Hog marketing in the next quarter of 2006 will increase and the market will pass through its usual year end softening. Producers, however, should continue to see profitable prices into the next year, pending affordable corn. Chicken supplies will be lower, which help support prices, and Canadian pig production will remain steady to slightly lower. Pork exports will continue to grow into the next year. A common wild card will be consumer perception, both foreign and domestic, of meat quality and safety.

Further Information

To read the latest USDA Quarterly Pigs and Hogs report, click here

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