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Time Required to Improve Live Hog Prices

by 5m Editor
5 July 2008, at 2:16pm

CANADA - Rabobank International predicts efforts to reduce North American swine production will take some time to begins to impact live hog prices.

“The catch phrase hogs, hogs and more hogs probably is still the best way to describe the industry at the moment unfortunately,“ observes Rabobank International executive director food and agribusiness research Fiona Boal.

Producers on both sides of the Canada-U.S. border are taking action to rein in production.

USDA Forecasts Continued Record U.S. Slaughter

Boal observes, the latest USDA Hogs and Pigs Report, issued June 27, implies the U.S. will see record slaughter numbers right through to the end of 2008. That means U.S. production will be anywhere from six to ten percent higher for 2008 compared to last year.

And she points out there are a lot of hogs to work through the system and large meat supplies, particularly in the U.S. She doesn’t foresee any large reduction in production before the middle of 2009.

“Just as the industry was quite slow to ramp up production when it was profitable,“ she suggests. “I think the same is the case in terms of reducing production. It’s actually a slow process and it takes you awhile to cut production.“

Canadian Cull Swine Program Hits 100,000

Approximately 500 Canadian pork producers have applied funding under the federal Cull Breeding Swine program. Under that program producers who depopulate breeding barns and agree to leave them empty for three years qualify for payments of $225 per culled animal.

The number of animals applied for so far has passed the 100,000 mark, still well short of the targeted 150,000, or about 10 percent of the national sow herd.

Canadian Pork Council executive director Martin Rice reports heavy participation in the Atlantic area, particularly the Maritime provinces where participation has been well over 10 percent. Participation in Ontario has also been significantly higher than the targeted 10 percent envisioned for the country. Saskatchewan is at 10 percent. Alberta, Manitoba and Quebec are below 10 percent.

Producers Reluctant to Commit to Leaving Barns Empty

“At this point it doesn’t look like we will get applications that will fully utilize the program account,“ says Rice.

He believes the key element that has discouraged participation is the obligation to leave the barn closed for three years. As well improved returns over the past few months through the commercial market have made the 225 dollar payout, with its conditions, less attractive.

He notes many producers are reducing their numbers without going through the program and without emptying entire barns or obligating themselves to leave space empty.

Smaller Producers Represent Highest Uptake

Manitoba Pork Council producer services specialist Jeff Clark recalls there was quick uptake in Manitoba when the program was launched April 14 but within two weeks the number of applicants started to taper off.

“In Manitoba we’ve actually been kind of slow to pick it up compared to some of the other provinces.“

Clark estimates applications have been received for 16,000 sows in Manitoba representing just over four percent of the province’s breeding herd. He notes applications have been received from across the province but most have come from operations with fewer than 300 sows.

“We do have close to about 73 applicants in Manitoba and of those about 15 are larger than a 300 sow operation, the majority being less than 300, 200, 100 in many cases.“

U.S. Herd Reduction Drives Up American Slaughter Numbers

Boal observes U.S. sow slaughter levels have been well above year ago levels for the first half of this year and are expected to accelerate further.

“I think many U.S. producers had been sitting back and waiting to see what the reaction of the Canadian industry would be to their dire financial situation. But now even those U.S. producers have started to commit to culling sows. In the U.S. we do know that some smaller operations are shutting down, particularly those diversified farms that can rely on grain revenue. And we do know that some of the larger producers are really getting very ruthless when it comes to cutting the bottom 10 percent of their herd.“

“Traditionally the meat industry has had to cut supply to induce higher prices and there is obviously that time lag associated with implementing that strategy,“ Boal explains. “It’s not simply a matter of changing production tomorrow.“

Down the road, she anticipates a sizable cut in U.S. production although it will be off a very high base and a slow continuation of the sow liquidation in Canada.

She foresees bigger cuts in the U.S. given its share of the North American market while Canadian production will also fall but not as quickly.

Return to Profitability Still A Way Off

Boal is confident a point will be reached where, by forcing supplies lower, prices will equally be forced to increase. However, based on the futures prices, she doesn’t foresee anything resembling profitability in the U.S. before about the third quarter of next year.

“I think what we’re at at the moment is a situation where higher input prices have simply not been worked through the system. They haven’t gone through the supply chain but higher livestock prices and subsequently higher meat prices are coming.“

Consumer Demand Expected to be Key

Boal warns, “Hog producers should not underestimate the importance of export demand, particularly in the current market conditions.“

She says given the volume of meat, including beef and poultry in the global market today, hog prices have held up amazingly well. She expects exports to continue strong.

As well, she observes, U.S. consumers have been very resilient and surprisingly so.

“We have seen some trading down, among consumers shifting their protein expenditure away from beef to less expensive chicken and pork. Pork did very very well over the start of summer and has continued to feature quite heavily in a lot of retail outlets.“

North American Industry Holds Long Term Competitive Advantage

Boal remains confident in the North American hog industry’s long term ability to compete. She believes, because North America is still a net exporter of grain, its pork producers are actually in a much better position than many of their competitors.

She notes the European industry is finding it very tough and continues to contract with the Danish and Dutch industries in particular facing very difficult market conditions.

She notes, while Chinese production is recovering slowly, high feed costs are likely to restrict the size and the speed of the rebuilding of its sow herd, which bodes well for countries that are able to export to that market.

Boal observes, South America continues to be a formidable competitor to both Canada and the U.S. in some key export markets.

“We expect to see Brazil enter the Chinese market quite aggressively over the next couple of months now that a few of their plants have been given authorization to export.“

However, Boal concludes, “As hard as it might be for players in the North American market, they actually are still very very competitive compared to some of the other countries that produce pork.“

5m Editor