Pork producers avoided a near miss last fall, by pulling enough market hogs forward into third-quarter 2002, thereby staying within packers’ slaughter capacities. The kind of speed and responsiveness displayed has never occurred before, so it begs the questions of why and how it happened last fall.
“There was a general awareness of potential price problems in the fourth quarter, and producers just decided they wanted to sell as soon as possible,” says Ron Plain, University of Missouri agricultural economist.
Economists such as Plain and information sources such as Pork, served up gloom-and-doom warnings of a 1998-type fourth-quarter price collapse. Producers received fair warning, but that may not be the only reason they reacted.
“There was an economic incentive to pull marketings forward,” says John Lawrence, Iowa State University agricultural economist. “Producers couldn’t afford to put more weight on hogs because feed prices were high.” He points out that producers did a good job of evaluating the economics of the situation.
Regardless of what motivated producers to adjust marketings, the fact is they made changes.
“It does look like producers are getting more anticipatory in their marketings,” says Plain. “It appears they cut sow breeding back earlier in this hog cycle than in past cycles. Usually, producers have to lose money for quite a while before they cut matings.”
Plain contends it’s a byproduct of large farms that are more focused on pork production, versus the diversified farms of the past. With managers focusing more on the pork production business today, they should be more anticipatory of market changes.
Production and technology advances also have played a role in producers’ ability to alter marketing and breeding plans.
“Producers are able to wean pigs several weeks sooner than in the past, so there’s a wider window of time when sows can be bred,” says Plain. “That gives sow managers more flexibility to look at what’s coming economically and then make breeding decisions.”
Another factor that may be stabilizing the live-hog supply, is the increased number of packer contracts. Combined with the industry’s structural changes, marketing contracts make for a more stable hog supply.
“There’s not much question that packer contracts have had some impact on creating a steady hog supply, but it’s impossible to separate how much of that is due to contracts and how much is due to structural changes,” says Glenn Grimes, University of Missouri agricultural economist. “Approximately one-third of the hogs sold by independent producers are under a window contract, feed contract or futures-market contract.”
On the flip side, market contracts may have made it harder for some producers to pull market hogs forward last fall.
Lawrence isn’t as convinced that hog supply has stabilized greatly. “We simply don’t get the dramatic supply highs and lows as we did a generation ago,” he notes.
Grimes questions whether production will fall 3 percent, as early indications suggest. He says farrowing intentions show only about a 1 percent decline through the first three quarters of 2003. Even with a 3 percent decline in the fourth quarter, it wouldn’t add up to a 3 percent decline for the year, says Grimes.
While supply swings may or may not be mellowing out, the reactionary price swings are more pronounced. It now takes less of a supply swing to change the live-hog price.
“Data would indicate the demand for live hogs is becoming more inelastic,” says Lawrence. “It used to be a 2:1 relationship, but now it’s 3:1 or 4:1.”
However, those elasticity changes are here to stay.
“There’s not much chance of the trend reversing, because the biggest thing that creates inelastic demand is packing plants running close to their slaughter capacity at all times,” says Lawrence. “In the past, plants could add a Saturday kill or a second shift to increase capacity. Today, virtually all plants run a Saturday shift and a double shift. Unless, packing plants suddenly decide to carry extra slaughter capacity, live-hog demand will remain more inelastic.”
If producers pulling hog marketings forward in 2002 is indicative of a more steady supply heading to packing plants on a regular basis it’s good news for the packers and retailers. On the other hand, if it’s a reflection of the market’s inelasticity and what happens when live-hog supplies exceed demand, it is not so positive.
“Packers probably now have to figure in a lot more periods of boom and bust for their returns than in the past,” says Lawrence. “USDA’s new retail price series shows that retailers also have a lot more volatility in their markets than originally thought.”
Overall, a more steady supply of pork would be positive for the industry, if that is what’s occurring. Inelastic demand can be a negative for producers because there’s less room for error. What’s not in question, is that producers are using available information to make quick decisions, which in-turn has provided some industry stability.
Still Changing With the Seasons
“The industry has tried for decades to eliminate seasonal production fluctuations, but there’s still a strong seasonal pattern,” says Ron Plain, University of Missouri agricultural economist.
Many experts thought the move indoors to confinement production and other technologies would reduce or eliminate seasonal fluctuations, but that hasn’t been the case. In fact, seasonal patterns may be getting more pronounced, says John Lawrence, Iowa State University agricultural economist.
Producers are constantly battling the animal’s biological fluctuations, while packers and retailers have made providing a steady pork supply to consumers a priority.
“Packers and retailers today are focusing more on the consumer because that’s who pays the bills. They are less concerned with producers problems,” says Plain.
If anyone can solve the challenges of seasonal fluctuations it would mean a significant windfall for the pork industry. So far, no technology has been able to make much of a dent.