Market Preview: Pig Crop Projections and Long-Term Trends

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 28 March 2009
clock icon 5 minute read

This afternoon, USDA will release its estimates of US hog and pig inventories on 1 March. Watch your e-mail on Monday for a summary of the report and its implications for supplies and prices through the first quarter of 2010.

Figure 1 contains the results of DowJones’ quarterly survey of analysts for their pre-report estimates. The expectations are obviously for more reductions in supplies over the next two quarters, but those heavyweight pig inventories are larger than were suggested for the same pig groups in the December report. In addition, analysts’ expectations of farrowings and litter sizes for the rest of this year suggest supplies near year-earlier levels for Q4-09 and Q1-10.

Long-Term Trends

Where is US pork supply headed on a long-term basis? That question is being asked by many observers and market participants as we head into this report and the 2009 crop-growing season. To explore an answer, let’s consider some history.

Figure 2 shows long-term annual US pork production back to 1930. To that actual data I have added two trend lines. The solid black line represents the trend for the entire time period. Beginning in 1930, this trend says that US pork production has grown at an average rate of 1.27 per cent -- at least that is the rate that results in a line with the best fit to all of the data points.

But note that this line has fallen farther and farther behind actual production levels for the past 11 years. Now those data points are part of the computations that go into the 1930-2008 trend line, but they are outweighed by that 65 or so years of data that covered a slower-growth period from 1930 to 1997.

So, what is the growth trend of the “modern“ US pork production system? I went back to 1984 and computed a linear trend line (the blue diamonds) that grows at a rate of 1.8 per cent. I chose 1984 because it marked the end of the wild fluctuations in pork output that followed the major shifts of grain prices and inflation in the early 1970s. It also marked the beginning of some major technology shifts – climate-controlled buildings, gestation stalls, advanced nutrition concepts, artificial insemination and others.

Finally, it marked a new era in hog and pork trade. Pig imports from Canada began to grow quickly in the late 1980s (remember the countervailing duty that was then in place to offset the Canadian Tri-Partite support system?), and US net imports of pork reached their largest levels in 1985-1987 at roughly 1 billion pounds. The remainder of the time covered the period that US pork exports were growing – often dramatically.

But the clear lesson is this: The output growth of the past two years is not sustainable. A less clear lesson is very likely. The output levels of the past two years may not be sustainable either.

The 2007 observation exceeds the “new trend“ for US production by 539 million pounds or 2.45 per cent. That is a pretty large number considering the US per capita consumption has been basically constant for 50 years.

But the 2008 number is pretty shocking. It exceeds the “new trend“ by 1,558 million (or 1.558 billion) pounds – nearly 6.7 per cent. If we could see exports grow by 50 per cent every year, that level of output and growth may be okay. But 50 per cent growth when exports are now taking 20 per cent of our production is very, very unlikely.

Trim Sow Herd Another 3-5 Per Cent

Will the numbers in Figure 1 get this done? No. US sow numbers have fallen – but only by 163,000 head (2.6 per cent) since the most recent peak in December 2007. Canadian numbers have declined more (229,100 head or 14 per cent) since their all-time high of 1.634 million head in January 2005. But the major contributor to the surge of output in 2007 and 2008 is a dramatic increase in productivity. Circovirus vaccines were the most important driver of that increase, but genetics and management are playing big roles as well in realizing larger litters.

The expected “hole“ in marketings this spring is no indictment of your productivity efforts. The productivity piece driving the December report’s estimate of a short pig crop last fall is litters per sow – primarily because we culled and slaughtered a good number of pregnant sows last summer when corn prices skyrocketed.

How many less sows do we need to return to “reasonable“ profit levels? That depends on one’s definition of “reasonable,“ but 3 per cent would be a good start and 4 to 5 per cent would be even better, given that at least a third of the reduction will be offset by productivity gains. The trouble is that financial losses this year may not be large enough to get much of that done – especially if my long-predicted spring rally finally arrives.

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