CME: Sharp Fall in US Sow Slaughter Levels

US - Barring any serious and widespread production challenges, a necessary condition for reducing pork output is a smaller breeding herd, according to Steve Meyer and Len Steiner.
calendar icon 17 February 2010
clock icon 4 minute read

Necessary — but not sufficient, especially in these days of remarkable productivity increases. Canada’s breeding herd has been declining since March 2005 while the US herd has been shrinking since October 2007. But the total decline has thus far not been large enough to make a large dent in combined US-Canadian hog slaughter. At least not a large enough dent to push hog prices to consistently profitable levels given a 20-30 per cent increase in costs. And recent weeks have seen US sow slaughter levels fall sharply — at the first hint of a profitable year in 2010.

The top chart below shows this drop to just 54,700 head during the week that ended on 29 January. That is the lowest non-holiday week total since August 2007 and the lowest non-holiday, non-summer vacation week since 2005. And it happened shortly after lower corn and soybean meal futures and a four-month rally in lean hogs futures had taken hog producers’ profit prospects to their highest level since 2007. Sow purchase data from USDA’s mandatory price reporting system (AMS report LM-HG230) indicate that this decline will very likely grow when slaughter data for the last two weeks become available. The purchase data appear in the middle chart.

Through September/October, the combined herd had declined 7.1 per cent from its most recent peak of 7.752 million head in October 2007. Canada’s herd has fallen by 190,000 head (12 per cent) while the US herd fell by 383,000 head (6.1 per cent). An additional 25,000 US breeding animals were removed from 1 September through 1 December. Canada’s 1 January inventory will be published on today.

The amount of reduction in the US-Canadian breeding herd needed to return to sector to profitability has been a topic of debate for the past two years. Early estimates were that the herd needed to be reduced 10 to 15 per cent from its fall 2007 peak. Some analysts believe smaller reductions are necessary if exports regain a substantial portion of their 2008 performance. But no one of whom we are aware counted on total productivity growth (litters per sow plus pigs per litter plus weight per pig plus pigs slaughtered per pigs born) of over 5 per cent for most of 2009.

The weight portion of that productivity increase was, of course, primarily due to an exceptionally cool summer but that same summer weather will contribute to productivity growth in 2010 as well. USDA’s December Hogs and Pigs Report indicated September-November farrowings and December-February farrowing intentions within 2 per cent of year-ago levels even though the 1 December breeding herd was 3.5 per cent smaller. Higher productivity may well mean that the breeding herd reduction must be larger than was once anticipated.

CME Group feed ingredient and hog futures markets are indicating that the reductions to-date may be sufficient to return the industry to profitability. Only time will tell but fundamental factors suggest that further reductions may be necessary if producers are to see some much needed profits beyond the summer of 2010.

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