CME: Hogs & Pigs Report Bearish as Expected

US - Friday’s quarterly USDA Hogs and Pigs report was, as expected, bearish with every Lean Hogs futures contract losing value on Monday, write Steve Meyer and Len Steiner.
calendar icon 3 January 2013
clock icon 5 minute read

The damage was least for the nearby February contract which only fell by $0.65/cwt. From April forward, though, 2013 calendar year futures prices fell by $1.25 (August) to $1.875 (May). February and April 2014 futures were $1.45 and $1.20/cwt. lower, respectively. Those price changes were about as we expected since the deviations of report numbers from pre-report expectations were not, in our opinion, dramatic enough to drive a limit-down day.

What are the implications of Friday’s "bearish" Hogs and Pigs report on potential 2013 hog and pork supplies? That is a question that will be bandied around a lot today, we think. The inventories and production expectations were indeed larger than expected so virtually everyone will be revising 2013 output upward. What are generally known are the expected percentage changes in hog slaughter relative to 2012. One big issue this year, though, is just what numbers to use as the 2012 basis for comparison.

The top chart below shows our computations as to what a "normalized" (not in the statistical sense, we point out!) weekly slaughter pattern for 2012 may have looked like. That "normalized" data is the result of distributing the projected sum of all 2012 FI weekly slaughter totals (111.872 million head) across the 52 weeks based on the average pattern over the past 5 years.

F1 Hog Slaughter, Weekly

F1 Hog Slaughter, Weekly

Based on USDA Hogs & Pigs Report, December '12

Comparing actual 2012 weekly data to this “normalized“ pattern confirms that 2012 was one screwy year for seasonal slaughter patterns! Actual slaughter fell short of the normal pattern in the first quarter, fell even further behind in June and July (quite logical, given 2012’s hot weather) and then jumped dramatically ahead of normal levels in August and September when producers moved hogs to market early to avoid unprofitable late weight gains. Weekly slaughter totals have remained above the normal expected levels through the fall.

Computing 2013 slaughter based on the “normalized“ pattern makes sense to us primarily because using the actual pattern doesn't make sense. Doing so provides projected slaughter totals that appear in the bottom chart — and the results are, we think, quite interesting since they show the big change in projected supply being in the summer months, not the fourth quarter as one might have expected from the December report. It also says that Q4 supplies may be lower than those of 2012.

The "normalized" numbers are, of course, dependent on returning to "normal" conditions. That includes an eventual return to more normal feed prices and, certainly, more normal summer temperatures. It is reasonable to expect marketings to stay ahead of last year’s pace through the winter since feed costs are still high and weather is, for the most part, a non-factor in today’s climate-controlled pork industry meaning that rates of gain will stay high at least until summer.

But are these slaughter levels in fact bearish for hog prices? MPR barrow/gilt weights remain about 2 lbs. (1 per cent) lower than last year and that gap has widened in the past couple of weeks. We think it is safe to expect weights to remain that much lower than year-earlier levels at least through the first half or 2013. The second half depends completely on feed costs. Reported reductions of Europe’s output— and we should note that there is little consensus on the size of the cut and some disagreement on whether there will actually be a reduction— should provide opportunities for US exports to grow again. The US population will grow slower than in the past but will still expand by 0.7 per cent. Considering all of those factors, Friday’s "bearish" report still indicates lower per capita US pork availability/disappearance/consumption in 2013. In fact, the reduction may be close to 1 pound (2 per cent) from the 45.7 pounds per person of 2011 and 2012 — and that figure is the lowest in our data set that goes back to 1955.

Yes, the output reduction may be smaller than had been expected. That means futures prices may have been a bit high. But 2013 will very likely see a reduction in domestic per capita pork supplies. The same is true of beef and, most likely, chicken.

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