CME: Hog Weights Near Record; No Sign of Decline

4 April 2012, at 1:05pm

US - There is an ongoing, active debate in the hog/pork sector regarding the status of current hog supplies and the implications that may have to supplies for at least the next six months, write Steve Meyer and Len Steiner.

At the heart of the debate is the impact of disease and weather on hog numbers in general and the number of market-ready hogs in recent weeks in particular. First, let’s review the pertinent facts. Hog slaughter has fallen well short of levels implied by the December Hogs and Pigs report in all but two weeks since January 1.

This is obvious in the chart below which shows weekly hog slaughter for 2012 as implied by the original December numbers and the numbers from last Friday’s March quarterly report. Actual YTD slaughter has been 2.5% lower than the December data’s predicted level.

Friday’s report implies very little change to weekly slaughter totals versus the December report. The only real differences between the numbers are for March — where actual slaughter still came in below the level implied by USDA’s 180-pound and over inventory — and for a few weeks in September. Based on actual Q1 slaughter, the March forecasts give an annual FI slaughter of 110.326 million head where the December report implied slaughter of 111.057 million head. And virtually all of the difference is, so far, in Q1.

Hog weights are near record large and not declining in their normal seasonal manner. The bottom chart at right shows average carcass weights for the barrows and gilts whose prices are reported to USDA under the mandatory price reporting (MPR) system. These are top barrows and gilts only. We suspect there are NO light-weight of “off“ hogs in it since the smaller plants that usually process those animals are not covered by MPR, but we do not know that for sure. We feel very confident in saying that hardly any “off“ hogs are included in this average, so it is usually a good gauge of the currentness of producer marketings.

The current debate is whether we are ultra-current in our marketings due to this winter’s mild weather or see marketings that are lagging due to lower packer margins and a resulting lack of enthusiasm to run plants at full capacity. The “ultra-current“ argument is based on anecdotal evidence that rates of gain have been excellent this winter. That is a bit surprising since we thought modern confinement systems had removed outside temperature as a key variable in performance. Big snow events still have an impact by causing logistical problems that can result in some out-of-feed events that slow performance. We thought lower winter temps would primarily impact financial performance through reduced propane costs, not through improved gains since barns would have been warm anyway. But the data say different, we hear. Counter-seasonally high weights support this “rapid gain“ position.

But if hogs are indeed growing faster this winter, why have slaughter numbers been LOWER than expected? Higher-than-normal growth rates should mean MORE hogs coming to market, not fewer. And that is especially true if weights are increasing, implying that we are not getting them slaughtered quickly enough.

The “backing them up“ argument would point to higher weights and lower slaughter as evidence that packers have reduced harvests due to this year’s lower margins. But how does one explain strong hog prices relative to the cutout value? Wouldn’t packers have aggressively reduced hog bids to keep margins more solid if pigs were coming to market faster than expected? Packer margins were close to historic levels until mid-March but even those margins were $20/head lower than one year earlier.

One obvious conclusion is simply that the 50 to179 lb. inventories in the December report were high. What about < 50? Intentions? And there is more. The dip in market weights seen in July 2011 was due to last summer’s six weeks of extreme heat. We understand that that heat wave caused some significant breeding problems that led to fewer-than-expected litters in November and December.

Those lower pig numbers should hit in late April. Will the declines be larger than “normal“ as shown in the top chart? Finally, were PRRS (porcine respiratory and reproductive syndrome) death losses larger, as many believe at present, than their normal level? If so, numbers could get tighter than indicated here in June and July.