Market Preview: Pork Producers Welcome Stability

by 5m Editor
15 November 2011, at 8:51am

US & CANADA - In this week's "Market Preview" featured in National Hog Farmer magazine, Steve Meyer presents an outlook of the US and Canadian pork market based on the latest "Canadian Hog Statistics" report released by Statistics Canada and the 1 September US and Canadian hog inventory report released by the USDA.

Canada's 1 October quarterly Hog Statistics report revealed a swine breeding herd that was larger than one year earlier for the first time since April 2005. Canada's herd of 1.3083 million head was 0.1 per cent larger than last year on 1 October. When combined with the US 1 September herd of 5.806 million head, the Canadian figure puts the US-Canada herd at 7.114 million, 0.5 per cent larger than one year ago.

This is the second quarter this year (the other being the 1 March-1 April inventories) that the combined herd has been larger than one year ago. The US-Canada herd had been smaller than one year earlier in every quarter since December 2007-January 2008 (Figure 1).

Is this the end of this round of consolidation/reduction for the US-Canada pork industry? We think it is for a couple of reasons. First and foremost, it appears the reductions have, along with increased exports and relatively strong domestic demand, pushed pork and hog prices high enough to generally cover new cost levels. With US lean hogs futures above $85/cwt., carcass, through next October, producers on both sides of the border are looking at profits. We don't think those profits are large enough to get much expansion but, after over six years of herd reduction, Canadian producers are no doubt happy with some stability. US reductions lasted only four years, but stability is welcome here as well.

The other reason we think consolidation/reduction is probably over for now is that producers that remain are generally very good at what they do and, in many cases, have pretty strong balance sheets. My calculations show that US producers have, on average, replaced about 40 per cent of the equity that was lost in 2007-2009. Canadian producers lost far more than did their US counterparts during their long downturn and likely have not healed as much, but the trend has at last turned. Those who remain are battle tested.

The cutbacks are not without other consequences. Canadian hog slaughter in 2010 was 11.3 per cent lower than at its peak in 2004 (Figure 2). Higher market weights reduced the impact on total pork production to only -1.6 per cent over that same period, but even Canadian pork production has taken a hit in the past two years, dropping by 2.3 per cent.

The same thing has happened in the United States (Figure 3). The cutbacks here have been much more recent but much more dramatic. In just the past two years, slaughter has fallen by 5.3 per cent and pork production has declined by 3.9 per cent from their 2008 peaks. That 2008 peak was, of course, driven in part by the impacts of the 2007 introduction of circovirus vaccines, but the 2009-2010 declines would have been very large even without the unusual 2008 slaughter levels.

US slaughter and production, of course, have been negatively impacted by the situation in Canada. The stronger Canadian dollar and mandatory country-of-origin labeling (COOL) have reduced imports of Canadian hogs from 10 million in 2007 to just 5.75 million in 2010.

We do not expect any reversal of the recent declines, but we do expect them to stop. The Canadian dollar is still strong and COOL is still the law of the land in the United States. Regardless of the World Trade Organization's (WTO) decision on Canada's challenge to COOL, which supposedly will be announced the end of this week, the law will remain in effect unless Congress changes it. The likelihood of that happening in the short run is quite unlikely.

While Canada does enjoy a bit of a feed-cost advantage from time to time, the advantage is small and often fleeting. We just don't see anything that will turn this thing to growth. Like most of you, we would settle for a bit of stability. It appears that time has finally come.

Sorry, No Charts this Week

Several pieces of data for our weekly Production and Price Charts were not available as of this morning due to Friday's observance of Veteran's Day. The data will return next week. You can see most of the data by clicking on "Prices and Production" here.