CME: Breeding Herd Reduction Finally Underway

US - The long-anticipated, apparently late and, according to many analysts, BADLY needed reduction of the US swine breeding herd may have finally gotten underway the week of 15 August, write Steve Meyer and Len Steiner.
calendar icon 28 August 2009
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FI sow slaughter for that week, released today by USDA’s Agricultural Marketing Service (AMS) was 69.1 million head, up 17 per cent from the prior week and 3.1 per cent from one year ago. This marks the first week since JANUARY that weekly US sow slaughter has exceeded the level of the corresponding week in 2008.

One of the difficulties in discerning what is going on in the swine breeding herd is that sow slaughter data runs two weeks behind. AMS estimates weekly hog slaughter for each week on Friday of that week but that number includes all hogs — barrows, gilts, sows, and boars. AMS does not break out the sexes or classes of animals until the Thursday two weeks hence. AMS does, though, have daily data on the number of sows purchased by packers who must report under the mandatory price reporting system.

The current MPR rules became one year old in mid-July so they now provide current data that is comparable to the data generated one year ago, providing a frame of reference. Since 1 January, the number of sows purchased each week has run about 16,000 head lower (since some sow slaughter companies are not covered by the MPR system) than actual sow slaughter. Adjusting the purchase data for this difference indicates that slaughter for the week of 22 August should again be near 70,000 head. Anecdotal evidence from producers, bankers and sow brokers tell us it may well be higher.

The graph below shows cash prices implied by CME Lean Hogs futures back on 24 April, actual negotiated barrow/ gilt prices and cash prices implied by Lean Hogs futures on Monday, 25 August. 24 April was the day before H1N1 influenza became big news. The difference in the "expected" prices in April and the actual prices to date have reduced hog producers’ revenues by about $1 billion, with nearly $246 million of that reduction coming since 1 August when cash prices began to fall sharply. That drop in actual revenue and the accompanying downward shift in the red line representing futures- implied cash prices through March 2010 have apparently put enough pressure on producers and bankers to get liquidation rolling.

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