CME: Hogs & Pigs Report Mildly Bullish

by 5m Editor
2 July 2012, at 9:35am

US - USDA’s quarterly Hogs and Pigs Report, released Friday afternoon, contained few surprises but we believe it may be mildly bullish come Monday’s trading session, write Steve Meyer and Len Steiner.

The key numbers from Friday’s report appear in the table below along with the average of analysts’ pre-report estimates in last week’s Dow Jones survey. As you can see, only one of the actual numbers (Sep-Nov farrowing intentions) differed by as much as 1 per cent from the pre-report averages. Such small difference do not make for many trading fireworks, even in the week of 4 July.

Some important numbers and their implications are:

  • The 1 June breeding herd is estimated to have been 5.862 million head, 1 per cent more than last year. That figure is slightly higher than expected by analysts but may have drawn a sigh of relief from some who expected even more growth given profits last year and the 2012 profits offered last winter by futures markets. Remember, though, that this is a “Kept for breeding“ number and it could have already changed given the June runup in corn and soybean meal prices. Our estimate of 2012 breakeven costs on Friday was $88.23/cwt. carcass. That is $4.57/cwt. (nearly $9.40/head) higher than on May 23 and, when combined with Friday’s Lean Hogs closing prices, put estimated profits for all of 2012 at just $1.29/head. More important — our 2013 estimates show a LOSS of $5.16/head at present. We expect some of this growth to be liquidated and some growth plans to be delayed pending the 2012 crop.

  • The 180-lb. and over inventory, at 0.5 per cent larger than one year ago, agrees reasonably well with June slaughter. Comparing equal numbers of weekdays and Saturdays this year to last indicates June FI slaughter is up 0.2 per cent from 2012. Not enough difference there to cast any doubt on the report.
  • March-May farrowings of 2.919 million litters were 0.1 per cent higher than last year. That may not seem significant except for the fact that the number is 1 per cent higher than the “intentions’ for this quarter that were published in the March ‘12 and December ‘11 reports. In addition, the June-Aug intentions grew by 120,000 litters (0.7 per cent) from their first intentions level back in March. We have commented on USDA’s farrowing intentions estimates appearing low relative to the breeding herd for the past three quarters. This “catching up“ pattern confirms our concerns — which we repeat again this quarter: Both intentions numbers look low relative to the breeding herd. U.S. producers are not leaving this much efficiency on the table and the final litter tallies for Jun-Aug and Sep-Nov will, we think, be larger than shown here.

  • The March-May average of 10.09 pigs saved per litter is a new record — BUT it is only 0.6 per cent larger than one year ago. That is sharply lower than the 2 per cent average growth rate for the past four years. Year-on-year increases in Sep-Nov (1.1 per cent) and Dec- Feb (1.7 per cent) were also below the robust annual averages of recent past. Do these mean growth in this key productivity metric is slowing? Or is it just catching its breath before returning to its previous breakneck pace? We do not have a sureanswer but our feeling is that 2 per cent may be ambitious for the next couple of years. BUT 0.6 per cent LOOKS LOW. Something in the 1.0 to 1.5 per cent range looks reasonable over the next few quarters.

  • Light-weight inventories indicate that hog supplies in Q3 and Q4 of this year will be smaller than what was predicted by the March report. That report pegged combined Q3-Q4 slaughter (we combine them because the separate quarters have one less and one more, respectively, slaughter day than in 2011) at +2.45 per cent. This one puts that figure at +0.6 per cent. That change amounts to 1.049 million fewer head in the second half of the year. As can be seen in the chart, it also reduces the level of slaughter capacity concerns this fall. Both factors will push prices higher than the level suggested by the March report.

Further Reading

You can view the Hogs and Pigs report by clicking here.