Market Preview: Upward Path Finally Taken

by 5m Editor
1 September 2009, at 9:39am

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.

US federally inspected (FI) sow slaughter finally went above year-ago levels the week of 15 August. That’s one of those occurrences that is hoped for and lamented at the same time. It means we may have turned the corner to the liquidation that is needed to restore profitability to our business. But it also means that some friends and perhaps neighbors will not be in the business to see those profitable days.

Figure 1 shows weekly sow slaughter for 2008 and 2009 as well as the weekly averages for 2003-2007. 15 August marks only the third week this year in which US sow slaughter has been larger than one year ago. The others were the weeks of 10 January and 25 July.

The same pattern holds true if one considers sow slaughter as a percentage of the breeding herd, which is probably a better measure of sow herd change, since we should expect lower numbers of slaughter sows with a smaller breeding herd. The week of 15 August was the second-highest percentage of the breeding herd (1.16 per cent) this year, second only to January 8 (1.18 per cent). Through 15 August, 26.6 per cent of the breeding herd has been slaughtered thus far in 2009, compared with 29.6 per cent in 2008.

Sow Slaughter in Canada

Canadian sow slaughter which at around 1,500 head/week only accounts for 2-3 per cent of the US-Canadian total, has been lower than one year ago every week so far in 2009, and is substantially lower than the 2,500 head/week that was the average from 2003 through 2007. This decline is quite understandable considering the reduction in the Canadian breeding herd from 1.634 million in 2005 to 1.38 million in 2009. You can’t slaughter them if they aren’t available!

Gilt Slaughter Data

The other component of female slaughter, of course, is gilt slaughter. While the Livestock Mandatory Reporting Act of 1999 required USDA to gather separate barrow and gilt slaughter numbers, USDA has never seen it necessary to abide by that law so we have no “official” gilt slaughter numbers. Professor Glenn Grimes and Dr. Ron Plain at the University of Missouri have gathered gilt slaughter percentages for several years through a cooperative project with midwestern packers. Those data indicate that the percentage of gilts in barrow-gilt slaughter has averaged 49.9 per cent for the year where 49.2 per cent to 49.4 per cent is equilibrium. The gilt percentage has exceeded the equilibrium level 24 weeks out of 32 this year and has been greater than 50 per cent in 12 of 32 weeks.

As an aside – the reason packers report and USDA publishes steer and heifer slaughter data separately has nothing to do with regulations or requirements. It is really just a matter of tradition. Packers have always reported it that way and so they still do so. That tradition, of course, is partly dependent on historic price differentials between heifers and steers.

Weekly Sow Purchases

Figure 2 shows another piece of data that may be helpful in gauging changes in the sow herd and doing so on a more “real-time” basis. It shows weekly sow purchases as reported to USDA under the mandatory price reporting (MPR) system. That system covers only about 60 per cent of sow slaughter capacity, so the total numbers reported (just over 50,000/week for the most recent two weeks) runs 15,000-17,000 head lower than total slaughter. But the data seem to be predicting the direction of change reasonably well and are available two weeks earlier than are slaughter data.

The purchase data may become more useful as we gain a better perspective with year-over-year comparisons. USDA rules were changed in mid-July 2008 to reflect MPR system changes in the 2007 Farm Bill. We just now have a full year of these new data and are now comparing "apples to apples" from a seasonal standpoint. That’s good. What is not so good is sow "purchases" had been higher than "apples-to-apples" data one year earlier for four weeks before actual slaughter went above year-ago levels. There may still be some quirks in these data or they may turn out to not be very accurate in making these predictions. We won’t know until we have more experience with them and that just comes with time.

Sow Cull Magic Number

How many sows need to be cut to get the industry back to profits? I still think the number is around 400,000 from last fall’s level. Tyson and Smithfield have accounted for nearly 50,000 of that. "Normal" sow slaughter would be a short 1 per cent of the breeding herd each week – about 60,000 head. Slaughter in the 70,000-75,000 head level would mean that the reduction could be made in 23 to 30 weeks.

Sow slaughter capacity is not an issue. My April estimate says US sow slaughter plants can handle 100,000 head/day. A good number of sow plants do not run five days/week, but there still appears to be plenty of shackle space to move these sows.

Profitably selling the products from these sows may be the biggest obstacle to higher slaughter levels. Just how much sausage and other "sow" products can companies sell at profitable prices? That question becomes a bit stickier when one considers that many of these products are branded and that price carries quality connotations. Sellers do not want to hurt their hard-earned quality reputations by slashing prices too deeply. Cooler weather, the beginning of school (and more breakfast eating), and football season tailgate parties will all help, but there is still a limit to just how many sausage patties and bratwursts can be moved at profitable prices. It is an issue we must keep in mind.