Growing hog inventories, improved herd health (due to reduced impact from porcine circovirus associated disease), and more Canadian market hogs will increase the fall hog supply. At the same time, some packing plants have closed, which has modestly reduced North America's slaughter capacity.
Now, the cyclical nature of increase market hog numbers in the fall months is nothing new, but the increase this fall is running a bit higher than was expected based on USDA's pig crop numbers. So prices are headed lower, note John Lawrence, Iowa State University agricultural economist, just how low will depend on how many week hog supplies meet or exceed plant capacity.
While everyone remember December 1998 when hog prices dropped to $10 per hundredweight. That, of course, was triggered by the large hog numbers and a shortfall of slaughter and processing capacity.At the time, plants were operating double shifts, Saturdays and even on Sundays. "While no one is predicting a repeat of 1998, there are several factors and analysts pointing to potential problems this fall," says Lawrence.
First a glimpse at the current status of packer capacity.
Last year, the largest daily slaughter run was just more than 428,000 head, with the weekly high at 2.24 million hogs. However, since then a double-shift plant in Mississippi closed, and a Sioux City dropped a shift. This has reduced daily capacity about 20,000 head, notes Lawrence.
Some other U.S. plants have added capacity, so the daily slaughter run is now estimated at nearly 425,000 head, according to Steve Meyer, president of Paragon Economics.
That puts the five-day total at 2.125 million. "Saturday operations will be an essential factor for slaughter capacity. While a 'large' Saturday kill for the fall is 120,000 head, the Saturday of Thanksgiving week in 2006 was nearly 400,000," notes Lawrence. That could mean a 2.5-million-head weekly kill is in store for this fall. However, a typical week should be closer to 2.25 million head, he adds.
So, how do hog numbers align?
Based on USDA's June Hogs & Pigs Report, about 1.2 percent more hogs are supposed to be headed for slaughter this fall. That would mean there will be only three weeks that run near the 2.25-million-head weekly capacity.
Last year's runs were lower than expected due to PCVAD, which caused higher than normal death loss in finishing barns. The vaccine is more available today and its effectiveness has reduces death loss-- to the point where hog supplies may increase more than indicated from breeding herd numbers and farrowing intentions.
Canada, facing its own packer capacity issues, have sent 16 percent more market hogs this year than last through early August. At the end of that month, Maple Leaf Foods decided to close a hog slaughter plant in Winnipeg, Manitoba, due in part to labor issues. That marks the second Maple Leaf plant to close this year.
Maple Leaf officials say they will move production to their Brandon, Manitoba, plant by 2009. That means for this fall and throughout 2008, more Canadian market hogs will be headed south for slaughter.
It now looks like slaughter runs will exceed 2006 levels by 2 percent or more. If that occurs, weekly slaughter could exceed 2.25 million head for six or more weeks during the fourth quarter, but it shouldn't reach 2.4 million head, says Lawrence. "If there is a larger “vaccine” effect or hog imports are larger, there will be considerable pressure on prices," he adds.
But there's more. While packer capacity is worth watching, there are other factors that could impact hog prices this fall.
Carcass weights, which had been running light, compared to the previous year, through much of 2006 and first half of 2007, are on the rise. Again, this begs the question about PCVAD and the vaccine's ability to boost productivity, including market weights. "Weights began posting year-over-year increases in July and are expected to continue higher through the rest of 2007," says Lawrence.
While the past 15 years have seen record U.S. pork exports, the first half of 2007 reports lower sales than a year ago. While most export markets are buy the same amount or more pork, Mexico, U.S. pork's second largest market, is buying less.
There's a lot of attention on China's need for pork and the hope that the country would knock on the United States' door. While U.S. pork exports to Mainland China and Hong Kong were up 24 percent from 2006 through June, it's questionable whether larger purchases will materialize yet this year. The futures market tends to get overexcited and may have already built in that prospect, notes Lawrence. That means if more purchases do materialize, it may already be figured into the market, which would limit upside price potential and increase the downside potential if they don't materialize.
From the competing meats standpoint, poultry supplies are starting to increase. Last fall, broiler producers facing red ink reduced chick placements, says Lawrence. This fall broiler producers are ramping up production, which means there will be more competition at the retail meat case.
Given these factors, producers should look for pricing options. Take a look at December futures, says Lawrence. E "Even with a typical basis, the farm level prices would average in the upper $60s per hundredweight (carcass weight) and live hog prices over $50. These prices should offer breakeven price protection for most producers," he says.
Source: Iowa Farm Outlook/ John Lawrence