Pork Supplies Expand into 2007

IOWA - The USDA released it estimate of the December 1, 2006 inventory of hogs and pigs on December 27. The USDA numbers were near trade expectations and are not expected to cause a major market adjustment. USDA indicated that the inventory of hogs was 62.1 million head, up 1.1% from the year before.
calendar icon 2 January 2007
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John Lawrence
John Lawrence

The number of market hogs increased 1.1% and the breeding herd increased 1.3%. Table 1 summarizes the report for the US and Iowa. Jun-Aug and Sep-Nov pig crops were up 2.2% and 2.6%, respectively. These are estimates of 1st and 2n d quarter 2007 slaughter. Dec –Feb farrowing intentions also showed a 2.2% increase from year earlier levels suggesting that hog slaughter for the third quarters of 2007 will be at least 2% higher than it was in 2006. The Mar-May intentions are up only 0.5%. This may be revised upward later as the Dec-Feb intentions were identical to the year before in the September report, but are now up 2.2%.

Iowa’s hog inventory increased faster than the nation and now stands at over 17 million hogs. The state’s breeding herd increased, but at a slower pace, and Iowa farrowings are expected to be lower this winter than a year ago.

Supply Factors

In addition to inventory and farrowing intentions, carcass weights, sow productivity, and Canadian live hog and feeder pig imports add to the US supply. These variables may not be as large of a factor in 2007 as they have been in earlier years.

Carcass weights are expected to be steady or lower on a year-over-year basis due to higher feed cost. This adjustment has already begun. Barrow and gilt carcass weights in the second half of 2006 were identical to the same period in 2005. However, the typical pattern is for weights to increase each year (Figure 1), though the rate of increase has slowed.

The other source of productivity is pigs per litter and litters per animal in the breeding herd. Figure 2 shows how breeding herd productivity has increased since 1990. Litters per animal in the breeding herd (breeding herd includes sows, gilts, and boars) have increased over 10% as has pigs per litter. Combined, we now produce 30% more pigs per animal in the breeding herd than we did in 1990. However, the rate of increase has slowed and sow productivity is adding less to the supply than it once did.

The flow of hogs and pigs from Canada may also slow in 2007. The number of slaughter hog imports declined 2% in 2006, but pig imports were up 12% from the year earlier levels. The Jul-Sep pig crop in Canada was down 3.4% and farrowing intentions for Oct-Dec are down 2.1%, both are year-over-year comparisons.

To put this in perspective, the Jul-Sep decrease is the second decrease in Canada in 10 years as their pork industry has grown. The other decrease was Oct-Dec 2005. A stronger Canadian dollar and a moratorium on hog buildings in Manitoba are expected to slow growth of the Canadian herd. As a result we may see fewer slaughter hogs imported to the US for slaughter.

There may also be a reduction or at least slower growth in pig imports, but the demand for pigs by US finishers will also be a factor. While some farmers may opt to sell corn rather than buy pigs to finish, many have a large sunk cost in facilities to consider. If they can cover the variable cost they have an incentive to operate the facilities.

Demand Factors

Domestic pork demand was weaker in 2005 than it was in 2004 and while this year’s demand estimates are not finalized, indications are that pork demand has been weaker again in 2006. Much of this weakness in domestic demand has been masked by strong pork export demand. US pork exports Jan-Oct were 11% higher than the year before. This will make 15 of the last 16 years that pork exports have set a new record. Pork exports to Japan, our largest customer, were down 7.4% through October, as were exports to mainland China. Volume to the other major export markets was higher.

Retail pork prices started the year lower than in 2005, but moved higher than the year before in August and have remained higher through at least November. As shown in Figure 3, the price of retail pork relative to retail beef has been steady, but pork has gotten more expensive relative to chicken in recent months. The broiler industry has begun to reduce supplies in response to narrow margins and higher corn costs. The resulting higher chicken prices should be supportive of pork prices.

Production and Price Forecast

Based on the supply and demand forecast described above, prices are forecast to remain be slightly lower than they were in 2006. Table 2 has my forecast for changes in production and Iowa –Southern Minnesota live hog prices by quarter. It also has the basis-adjusted futures forecast of live prices based on futures closes immediately before the report was released.

The rising corn prices since Labor Day are beginning to impact cost of production. While feed costs for producing a hog start prior to conception, the majority of the feed is consumed in the last three months before slaughter. We are in the process of updating the Estimated Returns to Livestock Feeding Series and will have revised values and procedures beginning with January 2007.

The revised numbers suggest that it takes approximately 12 bushels of corn to produce a hog farrow-to-finish and the new weight is 270 pounds. Thus, a $1/bushel increase in corn prices will result in a $4.44/cwt (live) increase in cost of producing hogs or about $6/cwt carcass weight.

Given the now higher corn prices and price forecast, pork producers may see some red ink during the first quarter of 2007. Summer prices should be higher than cost of production unless corn and/or soybean meal prices increase further. If we have sustained corn prices in the mid-$3.00/bu range producers are expected to be in the red again in the 4th quarter.

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