Hog markets remain strong considering last week’s sales of 2.002 million head. Iowa-Minnesota’s average price last Friday was 68.47 lean (50.66 per lb live weight) up 3¢ per lb lean from 7 days prior. Pork cut-outs last Thursday were 72.97 up from 70.53 the previous week. Cut-outs have gone from 63.08 to 72.97 in 14 days ($20.00 per head).

Consequently, packers have had much more money available to bid up the hog price. We expect lean hog prices to continue to strengthen over the coming weeks, as slaughter seasonally declines. It’s not real hard to come to this obvious conclusion when we have lean prices just under 70¢ and a 2 million head a week kill. As numbers drop towards 1.9 million hogs a week and weights continue to decline, the only way to ration supply is higher prices. Hang on – it will be quite interesting.

Canada-USA Combined Inventory

Last week, the joint Canada-USA swine inventory for December/January was released. Since we are in a continental market, the numbers tell us a lot of what the future holds in prices.

The combined breeding inventory of both countries has gained 12,000 in the last quarter - Not exactly great expansion. We would call it steady. In the last 12 months, the combined breeding inventory has gained 60,000 head or less than 1%.

Combined market inventory indicates about 250,000 more head than a year ago. This is less than 10,000 per week greater marketings over the next six months. Obviously, market hog supply will be quite similar in 2007 as 2006. In our opinion future lean hog prices averaging over 70¢ lean for the rest of the year are quite in line to where cash will be, with upside.

Productivity

The combined Canada-USA pig crops over the last four quarters add up to 138.616 million. When we divide this combined pig crop by last quarter’s combined kept for breeding inventory of 7.712 million, we come up with 17.97 per year – it is not very good. When we do the prior year, we come up with 17.95 per year. Begs the question – What is the cost of production of our industry. Most speculative cost of production calculations are done using greater productivity than 17.97. What is really frightening is that 17.97 is the average, half the industry will be below this number.

The combined Canada-USA pig crops over the last four quarters add up to 138.616 million. When we divide this combined pig crop by last quarter’s combined kept for breeding inventory of 7.712 million, we come up with 17.97 per year – it is not very good. When we do the prior year, we come up with 17.95 per year. Begs the question – What is the cost of production of our industry. Most speculative cost of production calculations are done using greater productivity than 17.97. What is really frightening is that 17.97 is the average, half the industry will be below this number.

Taking it a step further, the Canada-USA combined total sows farrowed over the last four quarters was 15,110 million. If we divide this by a combined kept for breeding total of 7.712 million, we come up with 1.95 litters per kept for breeding head per year. There is obviously lots of room for productivity gains in our industry.

What is really striking for us is the great discrepancy of productivity between herds. Last week, we spent half a day shooting a video at one of our customers. They (Woodland) weaned 30 pigs per mated female in the last calendar year. When you spend the time in the barn looking for any magic that made it possible, it becomes even more eye-opening when you realize there isn’t any. What you see is execution of basics; proper environment, good feed. Maximizing genetic potential. At the end though, it is people. It is all about people getting the basics done every day.

Everyday, people making the right decisions in the barn, getting it done when it needs to be done. 30 is extraordinary but we see the same attention to detail and execution in all 55 of our customers that exceeded 25 pigs per year in 2006. Daily execution of the basics and making the right decisions. When you see the disappointment of a continental average of under 18 pigs compared to so many over 25, it really makes you wonder. Why are so many missing the boat on maximizing production and profitability?

Other Observations

There are efforts in the US congress to speed up an implementation of Country of Origin Labeling (COOL). There is not a lot of upside to this for Canadian producers and even US producers if the program drives up cost. Last time we checked, poultry was exempt from COOL which will give them a financial edge versus pork. Sometimes you can implement programs that will enhance consumer demand. In our opinion, the implementation of COOL will not increase such demand as it’s nothing to do with quality, food safety, etc. The same consumers that flock to Wal-Mart to buy billions of dollars in product from China will not be excited by any benefits of COOL. Take COOL as it really is. A cheap political grandstand to use farmers’ money to drive down farmers’ profitability.

A couple of weeks ago, Olymel announced they were closing a hog slaughter plant in Vallée Jonction, Quebec in four months, the plant handles 28,000 head a week. They had asked the workers to take a pay cut from $28.00 per hour to $22.00 per hour. The workers had rejected the offer. At the time we speculated both sides were playing Chicken. Now, woe and behold, the workers have rethought their position and accepted the wage adjustment. This is good news for Olymel and Quebec producers, as long as the plant stays open. Olymel has been losing about one million dollars a week for the last three years. With 856 employees at the plant a $6.00 wage reduction is almost $200,000 a week in cost reduction for Olymel. It’s the right direction, but it is still not enough to correct a one million dollar per week shortfall. We expect Olymel will continue looking to the farmers and government to help fund their survival.

La Niña – We will be hearing about for the next few months. The bulls of the corn market are citing weather forecasts projecting drought-like conditions in the Midwest this summer, caused by La Niña, an abnormal weather pattern of cooling sea surface waters in the Pacific. This could trigger below-normal rainfall. On Friday, Chicago corn for March closed at $4.17 per bushel. December corn closed with life of contract highs of $4.14 per bushel. The good news in higher prices now means all the more corn and grain that will be planted in the US and the rest of the world this spring. If it does rain and weather is good, it will be a question of how high over 12 billion bushels will the US corn crop be. There is a saying – The cure for high prices is high prices.

Feed prices are high but lean hog futures and a static supply of small pigs are keeping feeder pig and early wean prices strong. Last week, some feeder pigs were trading over $70.00 and some early weans $56.00 per head. A reflection of supply-demand and a finisher side of the business that has made good money the last three years.

Conclusion

The Canada-USA breeding herd and market inventory is static. Hog prices should stay strong through 2007. Written by Jim Long, Genesus Genetics / Keystone Pig Advancement Inc. - 20th February 2007 - Reproduced courtesy Farms.com

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