Market Preview: Hog Runs Raise Concerns

US - Weekly U.S. Market Preview w/e 21st September, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 22 September 2007
clock icon 5 minute read

Last week's U.S. federally inspected (FI) hog slaughter total of 2.226 million head was the fourth-largest ever and a bit of a shock that it came so early. The three weeks that now stand ahead of that total on the all-time rankings all occurred in December, a time that we typically expect weekly highs to occur.

If Friday and Saturday's slaughter runs just equal those of last week, this week's total will be 2.240 million head and it will rank as the third-largest slaughter week ever. It is very likely that Friday's total will exceed that of last Friday and Saturday's run may do so as well. I don't think the total will be large enough to eclipse the current No. 2 week on record, with 2.258 million head processed the week of Dec. 18, 2004. The all-time high is 2.265 million the week of Dec. 19, 1998, when some plants worked on Sunday. We all remember how much fun that week was!

What Lies Ahead?

All of this begs the questions: "Where is this thing headed and just how alarmed should the industry be?"

I don't think there is any doubt that slaughter totals are headed upward this fall and that they will exceed what was predicted in the June Hogs & Pigs Report. We will get a fresh read on the supply situation on Sept. 28 when the next Hogs & Pigs Report comes out. I hope it gives us a much better feel for market hog inventories.

The increase in slaughter was dramatic back in March (see Figure 1) and, while it has jumped around a bit, we have had only one week below 2006 slaughter levels since then. The six-week average of year-over-year change is stabilizing between 3.5 and 4%, so that looks like a good range for the fourth quarter.

The shock comes in seeing where 4% more hogs leave us for weekly slaughter totals. Only one week exceeds 2.3 million head, but four of those fourth-quarter weeks will break the current record for weekly slaughter total. And that is if 4% is large enough to capture the increase in supplies.

I don't think anyone should be alarmed, but I think everyone should be concerned. The announced resumption of a partial second shift at Morrell's Sioux City, IA, plant will add 3,200 head of daily capacity and leave the U.S. total at 428,035 head. At 5.4 days/week and allowing for 7,000 head/day more "push-them-through" capacity, U.S. packing plants could handle 2.35 million head weekly. Hog prices would be under some pressure at that operating rate, but the pressure should not be huge.

Adjustments Will Be Made

What can be done? The first steps are in place. Packers have added capacity and are ready to push animals through. There is no real altruism in that as they expect to make a profit. That is not a bad thing and they are fulfilling their role in the system.

It appears that retailers have many pork features planned for this fall given the relatively high prices of both chicken and beef. That is very good news, but packers and processors need to push for retailers to extend those features over both time and product selection.

Don't expect any more help out of foodservice than is already in place. That has nothing to do with their desire to help. It is just based on the fact the foodservice operators have planning horizons of six months to a year. They may do some featuring, but they cannot change menus in the short run. The bulk of the extra product will have to go through retail and to export markets.

Exports were better in July and, we think, have been better in August. However, heating them up a bit would be a big help. While getting hogs through the packers is an issue, we also have to move the meat and there is just so much that can be done in the U.S. market without deep price cuts. The best solution will be a recovery of our exports. China could be a big part of that, but some recovery in shipments to Mexico would be a huge help, too.

Market weights suggest that we are relatively current at present, but producers need to keep that up in order to not back hogs up when the runs get even bigger. Hog prices are not likely to get much better as we go through this quarter, so there is little incentive to hold them. Get hogs moving when they reach ideal marketing weights and think ahead. Packers will be getting booked earlier and earlier and you will probably have to plan at least one week out in scheduling deliveries.

Finally, all of you loyal North American Preview readers can prepare to enjoy counting the money you will make this fall on those October and December Lean Hogs futures that you sold back in the summer. You did sell some, didn't you?

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