Breeding Herd

In the September 1 Pigs and Hogs report the USDA estimated the US breeding herd at 6.079 million head on September 1st. 19,000 more breeding animals than on June 1st (6.06 million). 19 thousand more breeding animals in the last three months is not significant expansion. This is less than 1/3 of 1% growth. Our contention has been that breeding herd growth was not happening at a significant pace and that the talk of expansion was far exceeding the reality. The USDA inventory confirms this premise.

The small growth in the USDA inventory when coupled with non-existent Canadian expansion (confirmed by the last three Statistics Canada Inventory Reports) indicates a next to static continental breeding herd inventory. The good news is that its hard to produce significantly more hogs without more breeding animals.

Market Inventory - 1st Sept. (thousands)
	2005	2006	Increase
All Market	55,873	56,625	+752
Under 60 lbs	20,764	20,998	+234
60 - 119 lbs	13,876	13,991	+115
120 - 180 lbs	11,404	11,555	+151
108 + lbs	9,830	10,082	+252

The USDA is reporting 752,000 more market hogs in. If it takes 25 weeks for a pig to get from birth to market (175 days), an average increase of 30,000 head per week or 6,000 more hogs per weekday for slaughter. Considering that there is currently a minimum 20,000 extra small pigs a week this year compared to last being shipped from Canada to the US for finishing, the net increase of US origin market hogs is minimal (estimate 10,000 a week). When we consider the absolute non-debatable fact that pig production in Canada is not expanding, the movement of small pigs from Canada to the US leads to more pork production in the US and less in Canada. The net continental pork tonnage doesn’t change as Canada has fewer hogs to slaughter, less pork to sell domestically and to export whether it is to the US or other countries.

The US human population grows approximately 1.5% per year and with historically per capita pork consumption. The US requires 1.5% more pork per year domestically. If pork exports continue to grow (as we expect), the demand equation remains strong. The market inventory on September 1st of +1% is a very manageable number in our opinion. We believe hog prices will average a minimum 65 cents lean from now through September 2007.

USDA Report - Sows Farrowing June - August (thousands)
2005	2006
2,918	2,924

The USDA report indicates that only 6,000 more sows farrowed in June to August this year compared to last.

USDA Report - Litter Size June - August
2005	2006
9.06	9.14

Litter size has positive gains year over year.

USDA Report - Pig Crop June - August (thousands)
2005	2006	Increase
26,449	26,727	+278

Circovirus

Last week was the annual Leaman Conference in Minnesota. A significant number of swine veterinarians attend. Antidotal reports from veterinarians attending were positive on the effectiveness of the circovirus vaccines in the field. A consequence of an effective circovirus vaccine would be more hogs reaching market. 1% more overall would affect market prices downward. We understand that there is still limited supplies of circovirus vaccine available for distribution.

Canada

The Canadian Pork and Swine Industry is under pressure with many issues; currency exchange rate, feed costs, etc. A few weeks ago we published the remarks of Michael McCain, CEO of Maple Leaf Foods, Canada’s largest hog producer and meat processor. In those remarks, McCain listed the numerous issues and concerns that he had for not only for Maple Leaf, but the whole Canadian Industry.

The challenge for the Canadian pork industry to sustain profitability was reiterated this last week by the actions of Olymel, Canada’s second largest hog and pork processor. Olymel is a co-operative with plants in Quebec and Alberta Canada. Last week, Olymel stated that it has had financial losses of 100 million dollars from 2003-2005, with the expectation of a further loss of $55 million in 2006. An aggregate of $155 million in losses. Of note when Michael McCain of Maple Leaf was speaking about concerns for the industry, it was by a CEO of a company that is showing profits.

Olymel announced last week their intention to hire the former Premier of Quebec, Lucien Bouchard (similar to Governor) to negotiate with unions, producers and government. We expect the main idea will be paying less to workers and producers, if possible.

Implications:

• Olymel problems, unfortunately, reflect a Canadian reality. Mostly single shift plants with relatively higher labour costs than the US.

• The Canadian cost price squeeze that is minimizing profit potential (re: losses), in the producer and packer sector. We expect more and more pigs being sent to the US to finish, as producers try to be profitable. This, in turn, shorts hogs for Canadian slaughter plants.

• The negotiations at Olymel could lead to production disruptions as strong labour unions tussle with an entity trying to stop its losses. Producers could get grade grids revised downward if market pressures allow.

• Olymel was to be a major partner in the proposed Olywest plant in Winnipeg, Manitoba. The chances of a company (Olymel) executing its part of a partnership in the face of $155 million in losses are minimal. There are a lot better bets than betting on a plant in Winnipeg any time soon.

• In the end, Olymel challenges are the Canadian Industry’s challenge. The challenges faced by Olymel are part of the reason that there is and will be no breeding herd expansion in Canada in the near future. It is hard to be profitable in the pork sector in Canada.

Conclusion: The USDA Hogs and Pig Report indicates mild production growth. We expect Lean Hog Prices to average at least 65 cents lean through August 2007.

Written by Jim Long, Genesus Genetics / Keystone Pig Advancement Inc. - 2nd October 2006 - Reproduced courtesy Farms.com