CME Group Commodity markets will be closed on Friday, July 4 in observance of Independence Day. All commodity markets, including grains and oilseeds will observe normal operating hours on Thursday and will then re-open for normal hours on Monday. There will be no Daily Livestock Report delivered Thursday night.

Friday’s USDA Hogs and Pigs Report has raised a few questions about the U.S. pork industry and U.S. pork producers. We posed one last week when we wrote “If pork producers are hurting so bad, why are they still producing so many pigs and not culling more sows?” Another one - more about the report than anything else - is “Is productivity really as high as this report implies?”

The graph at below shows quarterly estimated profits per the Iowa State University estimated costs and returns and quarterly year-on-year change in the U.S. sow herd. As one would expect, the two are correlated with the sow here generally following profits. On six occasions since 1991, ISU’s estimated profits have crossed from positive to negative levels We discount the late 2003 occurrence since it was driven by chicken export problems and the imposition of Japanese safeguard tariffs. Note that profits rebounded quickly in Q1-2004.

U.S. producers have reduced the breeding herd inventory within 2 to 4 quarters in the other 5 instances. The response this year has been as quick as any other we have observed since 1991, so it appears that U.S. producers are acting quickly in historical terms.

The magnitude of this year’s cut has, to date, been less than those of previous cycles. We believe that the strong financial position of the U.S. pork sector last fall has given producers more staying power than they held in past cycles. In addition, all of the other U.S. reductions occurred as Canada’s breeding herd was growing, sometimes quite rapidly, meaning that larger cuts by U.S. producers were necessary to have a positive price impact. This year’s U.S. cuts come after and on top of severe reductions in Canada that continue today. A “wait and see” posture is quite understandable. Finally, we would point out that the situation for U.S. pork producers GOT MUCH WORSE DURING THE MONTH OF JUNE — AFTER THE HOG INVENTORY SURVEY. We believe the September report will likely show a significant increase in the rate of liquidation.

Figure 1 addresses the productivity status of the U.S. herd. Total productivity grew by nearly 9% in the second half of ‘07 and remained near 7% higher in Q1-08. By far the largest component of those gains was litters per breeding animal. While we know that a) U.S. producers have stopped adding more sows to move from weaning ages from 16 to 18 days up to 19-23 days and b) circovirus vaccines have had a positive impact on sow productivity, these increases look very, very large. On possible reason could be an undercount of the breeding herd in 2007 and before. If that is the case, Friday’s herd of 6.069 million head may in fact represent a larger decline than is indicated — and may agree more closely with history in terms of rate of reduction.