Pork Commentary: Tough Week for Hog Producers

by 5m Editor
3 May 2011, at 3:13pm

CANADA - This week's North American Pork Commentary from Jim Long.

This past week saw May corn close at $7.54 a bushel, meanwhile in the last 10 days, lean hogs dropped from $1.02 lean per pound to a 95.225 cents close Friday (29 April), wiping a potential $15.00 per head off margins. That is a nasty move down. Average US 53 to 54 per cent lean hogs were $95.15 while USDA carcass cut-outs were $93.31 per pound. Packers are working for nothing or less. It will be really hard to push lean hogs higher without carcass cut outs moving up. Packers will work for nothing – they are almost like us farmers – but we doubt they will bid for any length of time for live hogs at a price higher than carcass cut-outs.

A while ago, US packers were making over $30 per head. Now they could be losing money it is the old supply and demand. When packers were making $30 per head, there was around 2.3 million hogs per week. Now, it is two million per week. With fewer hogs to chase, packers are bidding up.

One factor which could be helping packer margins is on export sales, which we understand are not in the USDA cut-out calculation. With about 25 per cent of US pork being exported, we expect export margins are better than domestic and this is helping fuel packer demand and allowing them to better their financial picture.

Corn planting is slow with wet weather delaying planting pushing corn prices higher $4.00 a bushel higher than a year ago. With a hog-to-corn ratio at 12.5 to 1, there is little profit potential for producers who buy feed. For producers who grow their feed, it has never been much better.

Last week, Cargill announced it had purchased Smithfield Foods Dalhart Texas empty swine operation for $32 million. The site, we understand, has a capacity for 35,000 plus sows. We find this interesting as it is the first major move for an increased breeding herd in the US in the last three years. Cargill as one of the world's largest privately owned companies is showing in our mind a very positive faith in the future of the US pork industry. Cargill is everywhere in the world and has shown they are adept at investing anywhere. The decision for Cargill to invest in Dalhart and America makes us believe as a very smart company they see a future in the US swine industry, and as one of major global grain traders a strong future for competitive meat protein production despite high grain prices.

Canada swine inventory

Statistics Canada has released its 1 April swine inventory report.

Canada inventory on 1 April (thousands of head)
Year Breeding herd Boars >6 months All other hogs
2005 1,628 36.3 13,442
2010 1,313 19.9 10,336
2011 1,308 16.9 10,501

As the table illustrates, the Canadian Breeding Herd and market hog numbers are basically the same as a year ago. We are treading water after the obvious huge drop in production capacity approaching 20 per cent in the last five years. You can also see the evolution of AI in production with half the boars in inventory compared to 2005. We see little in Canada to encourage expansion in the breeding herd with high feed prices and the Canadian dollar five per cent higher than the US dollar. It takes capital and courage to expand and we see little of that in Canada currently.

Currently, Eastern Canada (Ontario – Quebec) has 740,000 breeding animals (2005: 898,000) while Western Canada (Manitoba, Saskatchewan, Alberta) have 567,000 breeding animals (2005: 737,000). At one time, there was a belief the west would surpass the east in swine production due to the abundant grain and land available. It has not happened and it appears probably never will.

Great Britain

Last week, we read a report on the British pork industry by the British Pig Executive that the average producer of finishing pigs is losing around UK 318 (US$29.96) per pig sent to market. Little recovery in profits are expected soon with cost of production estimated at UK 31.60 (US$2.66) per kilogram carcass weight. That is a break-even of about US$1.20 lean per pound. Great Britain's sow herd slaughter is running 15 per cent higher than a year ago. High feed prices will continue to challenge global hog producers and we expect will continue to cut global pork supply.

US – Canada

US–Canada are essentially connected in a Continental market. Last week, the combined US–Canada first quarter combined inventory report was released.

First quarter inventory (thousands of head)
0 2010 2011 2011
as % of 2010
Kept for breeding 7,074 7,096 100
Market 68,144 68,678 101
Pig crop 34,841 35,119 101

In total, 27,000 more breeding animals and about 500,000 more market hogs year-over-year or about 20,000 more market hogs a week. There is next to no change. Nothing in these statistics indicate expansion just productivity gains. With an ever increasing continental population and strong pork export demand, we expect to see lean hog prices to be around $1.00 lean a pound through the summer of 2011 and have strong prices through the summer 2012.