CME: Estimate of Breeding Herd to Play Major Role

US - One number that will get plenty of attention in this Friday’s Quarterly Hogs and Pigs report from USDA will be the estimate of the number of animals kept for breeding, commonly refered to as “the breeding herd," write Steve Meyer and Len Steiner.
calendar icon 22 June 2011
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That number is the best estimate of the production capacity or potential of the US pork industry for the coming 6-12 months. It should drive the number of litters farrowed over that time horizon and the number of litters, combined with the average litter size (or "pigs saved per litter" in USDA parlance) tells us the US pig crop for a given quarter. That number, in turn, drives barrow and gilts slaughter two quarters hence — with some adjustment for seasonality, of course. However you compute it, the breeding herd is the engine that drive the train forward.

There are three major components to changes in the sow herd: Sow slaughter, sow death loss and the number of gilts retained. The only one of those for which we have hard and fast data is sow slaughter. Even the University of Missouri’s data on gilt slaughter as a per centage of total barrow and gilt slaughter (which should be negatively related to gilt retention) is pretty noisy and not near 100 per cent accurate in predicting gilt retention. (The Mizzou data is available weekly in a "per cent change from one year ago" here. Most analysts handle the two unknown factors with a "need to balance" number in their sow herd vs. sow slaughter calculations. The “need to balance“ figure is based on historic seasonal relationships for the quarter in question.

There is a natural rate of sow replacement simply based on the life cycle of sows as breeding animals. Replacements occur as sows either die or are shipped to slaughter due to poor reproductive performance (small litters, poor milking ability, the inability to breed back in a given period of time, etc.) or physical challenges such as lameness, injury or teat/udder problems. Sow death loss was once a major challenge in the US but more attention to sows’ welfare and selection for longevity traits has reduced the number to, we believe, somewhere near 6-8 per cent per year in recent years. Some death loss is unavoidable.

Deviations from this natural replacement rate are based on economic conditions and expectations. The primary drivers of these changes are, of course, the actual and expected prices of market hogs. Higher prices generate profits which will attract new entrants and be used by current producers to grow their businesses. Producers know full well that good times will not last forever but if they want to expand their businesses they must do so when times are good. On the other hand, lower prices generate lower profits causing some producers to reduce output and some producers to exit the business entirely.

Prior to 2007, feed costs had very small and very fleeting impacts on sow herd expansion or contraction decisions. The reason was that feed costs were low and relatively stable. A 20 per cent swing in the price of corn amounted to about 50 cents/bushel and changed average output costs by $5 to $6 per head or roughly 5-6 per cent. Today, the same 20 per cent swing in corn prices (half of which we witnessed just last week!), changes the corn price by $1.20-$1.40 per bushel and changes hog production costs by $10 to $12/head. And that does not count the impact that corn prices have on prices of other ingredients such as DDGS and soybean meal.

But even the chart below does not tell the entire story. US sow slaughter includes more than just US cull sows. It also includes 8-10 thousand sows imported from Canada each week — a number that has continued to trend downward as Canada’s breeding herd has shrunk. The top chart on (see below) shows US slaughter of only US-origin sows. Note that these numbers are significantly higher relative to one year ago since mid-April when compared to the total sow slaughter numbers.

Finally, there is the issue of the smaller sow herds in both the US and Canada. Canada’s herd on 1 April was 20 per cent smaller than at its January 2005 peak. The US herd on 1 March was 7.1 per cent smaller than at it most recent cyclical peak in January 2008. Other factors held constant, sow slaughter must decline as the available supply of sows declines. So what happens to the percentage of the herd slaughtered each week?

The lower chart (below) shows slaughter of US sows (ie. imported Canadian animals are removed) as a percentage of the US breeding herd at the beginning of each quarter. This number has been relatively stable in the range of 0.8 to 0.9 per cent each week with some seasonal increase in the summer months likely due to seasonal infertility. Note, though that this measure of sow slaughter surged last fall when feed prices began to rise and has increased again since early April relative to one year ago. It will be interesting to see if the surge shows up in Friday’s report as a slightly smaller US breeding herd.

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