Market Preview: Canadian Sow Cuts are Sizable

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 1 November 2008
clock icon 5 minute read

Canada’s quarterly Hog Statistics report confirmed what many expected this week when it pegged the country’s breeding herd at 1.416 million head, 8.6% lower than one year ago. In addition, Statistics Canada revised its breeding herd data for January, April and July downward largely in line with levels that analysts and industry observers believe to be correct.

Figure 1 shows year-over-year percentage changes for breeding herds in Canada, the United States, and the two countries combined.

The original breeding herd estimates for January, April and July are represented by the X’s in Figure 1. As you can see, this month’s revisions are significant, especially for July where the year-over-year change went from -4.6% to -7.4%. That is not a surprise to readers of this column, as I questioned the July estimate when it was published in August. This number is much more in line with what I expected given the losses incurred by Canadian producers since 2005 and the ongoing breeding herd buyout program in Canada.

As of the September and October counts in the United States and Canada, respectively, the U.S. breeding herd is 160,000 head smaller than one year ago, while the Canadian herd is lower by 127,900 head. The 287,900-sow decline amounts to a 3.7% reduction in the combined breeding herd – still a relatively small cutback when one considers what would be required to drive prices high enough to cover higher production costs. Granted, the production cost increases do not appear to be as large as they once did, but my forecasts for U.S. costs based on futures market prices are still near $70US/cwt., carcass, for most of 2009.

The Canadian breeding herd is now 217,500 head smaller than it was at its peak in January 2005. The U.S. breeding herd is 172,000 head smaller than its most recent cyclical peak in December 2007. Again, the two combined herds are 287,900 head (3.7%) lower than at their combined peaks in October 2007.

Canada’s producers reduced farrowings by 3% in the July-September quarter but plan much larger reductions for this fall (see Figure 2). I would be surprised if actual farrowings fell by this much given the ability of producers on both sides of the border to increase efficiency in difficult times.

I discovered a curious practice on the part of Statistics Canada in this report – they do not publish farrowing intentions for two quarters forward in the April or October reports. I had never realized that before, so I inquired about the practice. Their polite reply: “We’ve always done it this way, but we will take a look at changing it.“ That was a very reasonable response, especially when the respondent also told me that intentions for January-March (for which Stats Canada apparently gathered data but did not publish) were about the same as those for October-December. That number is reflected in Figure 2 as a roughly 5% reduction from January-March 2007 – far smaller than the planned reduction in the fall quarter.

Guarded Optimism

Are Canadian producers optimistic about 2009? I would say they are guardedly so, willing to take a wait-and-see attitude with feed prices falling. The same pattern (a smaller decline in two-quarters-forward intentions than for one-quarter-forward intentions) was apparent in the September U.S. Hogs & Pigs report.

The bottom line is: Reductions in breeding herds continue, but productivity gains will eat up much of the declines by the time pigs reach slaughter weight. A Canadian breeding herd that was 7.4% smaller on July 1 produced a July-September pig crop that was only 2.5% smaller (see Figure 3). That productivity increase is even larger than what the U.S. report indicated. It fits my expectations, though, since sow herd cuts have been deeper in Canada, leaving only the most productive farms and sows still active.

Based on the most recent pig reports from each country, I still expect 2009 Canadian-U.S. slaughter to be less than 3% smaller than 2008. That will not support prices enough to cover higher costs unless hog demand remains excellent. And we are seeing some problems on that front as both meat and byproduct values fall.

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