CME: <i>Hogs and Pigs</i> Report Turns Out as Expected

US - Friday’s quarterly Hogs and Pigs report from USDA was very much as the market expected and will most likely be viewed as neutral in Monday’s markets, write Steve Meyer and Len Steiner.
calendar icon 27 June 2011
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USDA pegged the 1 June inventory of all hogs and pigs at 66.0 million head, 350 million or 0.5 per cent higher than one year ago. That increase is 0.4 per cent larger than was expected by DowJones’ survey but that difference is not large for the Hogs and Pigs Report.

The question of whether US producers were expanding the breeding herd is answered by "Yes, but not by much versus last year." The 1 June breeding herd numbered 5.803 million head, 0.3 per cent larger than both last year and on 1 March. That percentage translates to 15,000 more breeding animals than on 1 March, a reasonable number in our eyes due to the profits offered by futures markets earlier in the year and the fact that many farms had some slack space and several sow units were empty as a result of the reductions of 2008-2009. The recent improvement of profits prospects due to lower feed ingredient futures and higher LH futures will likely encourage expansion later this year ONCE PRODUCERS SEE THAT THERE WILL INDEED BE A REASONABLE CORN CROP. Anecdotal evidence suggests that there are a number of savvy producers who have managed the risk of the past 3 years very well thus leaving them with strong balance sheets capable of handling an expansion. Lenders are going to require VERY strong balance sheets but there are some producers who will meet the criteria and move into expansion mode. Add those to Cargill’s repopulation of the former Smithfield sites in the Texas Panhandle and our contacts suggest that we could see 30,000 to 50,000 more sows by next year and as many as 80,000 more by 2013.

But that growth has not started yet and this report says slaughter for the next 12 months will be changed very little from the previous 12 months. The chart below shows our weekly forecasts. Those for July through year’s end have been adjusted to account for last year’s odd seasonal pattern driven first by poor 2009 corn and then by good quality 2010 corn. While some weekly numbers differ from last year, our forecasts for Q3 and Q4 slaughter are +1.1 per cent and +0.1 per cent, respectively, from 2010 levels.

As did the March report, this report contains conflicting data regarding productivity. First, the average number of pigs saved per litter set a record of 10.03 ( the first time ever over 10) for the March-May quarter. That brings the 4-year average growth rate for litter size back to an even 2 per cent — and it is not slowing. But, the report also continues to forecast lower farrowings even with a larger breeding herd — a reduction in breeding herd productivity that we find pretty doubtful. While growth in the number of litters per breeding animal is, in fact, slowing, logic does not support a decline in this important driver of total productivity and profits. There is a practical limit for this number at just above 2, but having four straight quarters (implied by this report) has not happened since 2007.

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