CME: Key Numbers Larger than Hog Report Estimates

US - USDA’s quarterly Hogs and Pigs report, released Wednesday afternoon, had no numbers that were surprisingly larger than expected but, for the first time in our memory, had EVERY key number larger than the averages of analysts’ prereport estimates, write Steve Meyer and Len Steiner.
calendar icon 30 September 2011
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So, while no big moves are anticipated, analysts are generally seeing the report as bearish. CME Group electronic Lean Hogs futures were lower in after-hours trading but were no lower than their pit-traded brethren had been at the close on Wednesday.

The key numbers from the report as well as analysts’expectations for year-on-year numbers are in the table below.

First, our usual tests of the report. The June –August pig crop of 29.084 million head is 0.7 per cent larger than one year ago. That fits perfectly with June-August farrowings of 2.901 million litters, 1.5 per cent lower than last year and June-August litter size of 10.03 pigs per litter (more on this later) which was 2.2 per cent higher than one year ago.

The 180 pound and over inventory of 10.878 million head was 3.4 per cent higher than last year’s total. Most of those pigs have been slaughtered by now so we compare that change to the change in slaughter from 1 September to date.

Adjusting to make sure we have the same number of weekdays, Saturdays and holidays (only Labour Day), that comparison says this year’s slaughter is up 3.9 per cent.

Adjusting for a small difference in the number of market-ready pigs coming from Canada puts the number at four per cent.

The USDA estimate is not precise but is also not far enough from the actual slaughter change to cast much doubt on the report. An aside: USDA can’t win on this one—if the numbers don’t fit together, we throw rocks at their report.

If they do fit together we wonder if they cooked the books to make things match. I think we should give them the benefit of the doubt and simply say this report is internally consistent.

A key difference in this report and the June report is the relationship between the breeding herd and farrowing intentions. Recall that the June report had intentions of 97.4 and 98.4 per cent of year -ago levels on a breeding herd that was pegged at 100.3 per cent of one year earlier.

We commented at the time that that gap was large and suggested that we may see more litters in June-August and September to November than those numbers suggested. And we did in June/August — 2.901 million actual versus 2.867 million intended. 34,000 litters at 10 pigs per litter is 340,000 more pigs just from higher farrowings. That adds one per cent to the June-August pig crop.

Intentions for the next two quarters are 99.8 and 100.5 per cent of one year ago — numbers that are still below the level suggested by the size of the breeding herd and the long-term trend toward higher efficiency.

But let’s remember that the July-August heat wave could well have decreased the number of sows settled for November and December farrowing. We think the report numbers are reasonable given these likely reductions.

Finally, litter size marches merrily along, tying the all-time record set in the April-May quarter and setting a new standard for June-August.

The 2.2 per cent growth rate marks the 10th time in the past 13 quarters that the year-on-year rate has exceeded two per cent. We still believe it will continue to grow at or near this rate.

Danish producers have proven it is possible with their 12-plus litters. Feed costs will provide ample incentives to spread sow costs over more pigs and, at least for the foreseeable future, the sow market will provide economic incentives to trade old genetics for new genetics and keep herds relatively young.

So what do these numbers mean for supplies going forward? We think the answer is “Larger but not hugely so.“ Putting pig flows into quarters using these numbers is difficult because we are still comparing slaughter rates to some pretty strange flows last fall when the last of 2009 corn was fed and pigs practically exploded on better quality 2010 corn and cool weather.

We think Q4-2011 slaughter will not be much different from that of 2010 — mainly due to 2010 being unusually large due to those growth rates. Weights may not match those of last fall so supplies will be slightly lower.

Our calculations put Q1-2012 up a short one per cent, Q2 up 1.8 per cent and Q3 up 2.1 per cent. We expect Q1 weights to be one per cent or so lower than in 2011 while others will be about the same.

Analysts Altin Kalo, (Steiner Consulting), Jim Robb (Livestock Marketing Information Center) and Dale Durcholz (Agrivisor), speaking on the National Pork Board’s post-report media call, all put 2012 prices lower than those of 2011 but not dramatically so.

They generally expect Q4 hogs to sell for $82-$86/ cwt. carcase and Q1-2012 hogs to be in the range of $83-$88. They still expect Q2 and Q3 hogs to be near $100/cwt next year with quarterly averages forecast by the analysts in the $90-$97 range. Q4 prices are expected to fall back to the low– to mid-$80s.

The critical factor in this scenario will be demand. Domestic demand may have to withstand an economic slowdown and export demand may have to overcome a stronger dollar, at least in the short run, to keep product moving at these kinds of prices.

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