Ever since the 1998 price crash, pork producers and industry experts alike have been asking one question: Could it happen again? The fourth quarter of this year has long been considered the most dangerous time for a possible repeat.
While most industry experts are not expecting to revisit the disastrous prices of four years ago, fourth-quarter 2002 is expected to be the low point in this hog cycle. It also means that slaughter capacity could be pressured again. However, the results are more likely to be reminiscent of the lows in the 1994 hog cycle. One big X-factor in the slaughter-capacity balancing act is the influx of hogs coming from Canada. The Canadian pig crop was about 8 percent higher in 2001 than in 2000. Farrrowing intentions for the first and second quarters indicate a 7.8 percent increase in 2002 over 2001 levels.
"There are several reasons why so many Canadian hogs are coming across the border," says Ron Plain, University of Missouri agricultural economist. "Canada has more hogs to deal with and the strength of the U.S. dollar makes it more profitable to send them here."
In fact, while U.S. production has tempered, Canadian pork production has been growing since 1997.
"One reason Canadian production has not slowed like U.S. production is that they don't have as many environmental restrictions and have not seen the kind of political attention that has been leveled against the U.S. Hog industry," says Steve Meyer, National Pork Board director of economics.
Canada's production is slightly less than one-third that of the United States. However much of Canada's increased production ends up in U.S. slaughter plants. Last year, the United States imported more than 50 percent of Canada's increased pig crop as feeder pigs or slaughter hogs. The weekly data indicates it's happening again this year, says Glenn Grimes, University of Missouri agricultural economist.
"There is nothing in the data to indicate the current up trend in Canadian feeder-pig imports will subside," says Al Prosch, University of Nebraska Extension Pork Central coordinator.
The reason for the Canadian feeder pig influx, is simple: U.S. producers need them. The Canadians are filling voids in feeder pig production left by production declines in southern Missouri, Arkansas and Tennessee.
"It's tough to buy feeder pigs in the United States, production has dropped dramatically in the last four years," says Plain. "Canada is one of the only sources left, and with the currency exchange rate, Canadian pigs are generally considered a good buy."
Meyer says that U.S. political and environmental restrictions have limited the amount of sow units that can be built, which has sharply cut feeder pigs availability.
Considering U.S. hog numbers and projected Canadian growth, Grimes notes that North American hog supplies could be 2.1 percent larger than last year. That's figuring no additional productivity gains. In terms of the fourth quarter, the United States can expect slaughter to run about 27 million head.
"We can't rule out that 27 million head might cause some slaughter
capacity issues," says Grimes. "With that total, there will probably be only one month of capacity pressure, and fourth-quarter prices should average in the upper $20 range (liveweight), with lows in the mid $20's."
Again, that scenario is dependent upon no productivity growth. USDA's March Hogs and Pigs Report indicates that pigs per litter has stabilized, which is good news – provided it's true, says Plain.
"I'm somewhat skeptical because of the abrupt end of the 1990s rapid productivity growth," says Plain. "Factors that caused the productivity growth to occur, like better management and facilities, are still in place."
If productivity were to increase 1 percent over year-ago levels, Grimes expects fourth-quarter slaughter to climb to 27.26 million head, which would be 3 percent over fourth quarter 2001.
"There would be some slaughter capacity problems in this situation," says Grimes. "I would expect it to fall between 1994 and 1998 in severity."
Meyer projects weekly slaughter to exceed 2 million head around the third week of September and stay that way through year's end, with the exception of holidays. He sees about five weeks of slaughter above 2.1 million head, peaking around 2.2 million head per week just before Christmas.
"The breaking point for really low prices is about 2.15 million head a week," says Meyer. "If slaughter doesn't exceed that level for a sustained period, fourth-quarter prices should average in the low-$30's to upper-$20's. If slaughter exceeds that point for a substantial time, prices could hit the low-$20's to high-teens."
The question that remains: Can anything be done to ease slaughter-capacity pressure in the fourth quarter?
"Most of the Canadian pigs come south as segregated early weaned pigs, so they're here five months prior to slaughter," says Plain. "By the time the United States realizes there may be a slaughter capacity crunch, the pigs are already here."
Once pigs are in the United States, there is no going back. Due to health concerns, primarily psuedorabies, Canada won't allow U.S. hogs to enter Canadian packing plants. So, the 5 million Canadian feeder pigs will be slaughtered in the United States this year.
"It's not too late to do a few things," says Meyer. "First, any Canadian slaughter hogs sold to U.S. packers via the spot market may be able to stay in Canada to be slaughtered, which would be positive for everyone."
As a rule, U.S. packing plants have been much more efficient than Canadian plants.
"Getting a good, economical work force is a challenge in Canada, which is one reason U.S. packers have been able to outbid Canadian packers," says Plain. "If Canadian plants increased their
labor and capacity, the U.S. slaughter-capacity crunch would end in a couple of months."
However, Canadian packers would have to be convinced that they could capture a significant amount of the pigs coming to the United States, either as slaughter hogs or feeder pigs. Prosch says that could require at least a year of aggressive finishing-barn building in the Prairie Provinces. Even then, expanding slaughter capacity could be risky.
"If currency exchange rates remain the same, there still would be limited incentive to feed out and slaughter hogs in Canada, compared to selling feeder pigs to the United States," says Prosch.
Some of this is moot, as most of the 2 million Canadian slaughter hogs headed for U.S. packers are sold under pre-existing contracts.
The other option to ease the fourth-quarter crunch is to be selective in saving poor-growing pigs to be sold in that period. A poor-performing pig will have substantial losses when fourth quarter prices drop as expected.
For the most part, the die is cast. As is typical, the fourth quarter will see the year's price lows, but just how low prices could go is still up for grabs. If you have a low risk tolerance, review price-protection options.
"If everything runs smoothly, prices may not be anything like 1998. Still, I don't think the industry can stand any disruptions from the fall through the end of the year," says Prosch.