U.S. pork producers trimmed their breeding inventories to a near-record low over the summer and the total herd fell to a four-year low, reflecting a sluggish economy and escalating corn prices that are discouraging expansion.
Animals kept for breeding as of Sept. 1 fell about 1.4 percent from 5.875 million head a year earlier, based on a survey of analysts conducted by Reuters before the USDA’s Quarterly Hogs and Pigs Report.
The projected decline would send the breeding herd, a harbinger of future pork supplies, near the record-low 5.76 million head recorded for March 1. The USDA report is scheduled for release at 2 p.m. Central time Friday.
Hog prices more than doubled over the past 12 months, based on Chicago futures, as the herd shrank and pork exports improved. The price rally restored producer profits over the spring following nearly three years of losses. Still, producers remain reluctant to add sows or build new hog barns, analysts say.
“This is a continued reflection that your hog industry is not in an expansion mode,” said Bryan Doherty, senior market advisor with Stewart-Peterson, a West Bend, Wis.-based consultant. “Producers are saying, we don’t want to get caught holding too much inventory, especially if corn prices move higher.”
If the breeding herd shrinks as expected, it would mark the 10th consecutive quarterly decline versus year-earlier levels stretching back to March 1, 2008, according to USDA figures.
The total U.S. hog inventory as of September 1 is expected to be down about 2.8 percent from 66.72 million head a year earlier, based on the Reuters survey. A decline close to analyst expectations would leave the total herd at the smallest level for Sept. 1 since 2006.
Hog futures fell this month but remain near summer highs. At today’s close, October lean hog futures traded at CME Group fell 0.4 cent to 78.3 cents a pound. October reached a contract high of 80.075 cents on Aug. 2. The CME contract is based on carcass values.
With supplies expected to stay constrained, prices in the low- to mid-80s, in cents per pounds, is a “very feasible area for hogs to be,” Doherty said. June 2011 futures traded around 85.75 cents late today.
Pricier corn is a growing concern for livestock feeders, analysts say. Corn futures in Chicago rallied above $5 a bushel earlier this month, reaching two-year highs, on expectations the U.S. harvest won’t be as strong as once expected.
“Harvest reports have been mixed… at best, and many crop observers do not expect yield reports to get much better,” Jack Scoville, an analyst with Price Future Group, Inc., said in a report today.
“There seems to be no real reason to expect significant weakness in corn prices in the short- to medium-term despite a seasonal tendency for futures to move lower into harvest,” Scoville said.
Near today’s close, December corn at the Chicago Board of Trade, fell 6 ¼ cents to $4.98 ¾ a bushel. The contract reached a two-year high of $5.23 ¾ on Sept. 20.
Additionally, the weak U.S. economy remains worrisome for the pork industry, with high unemployment fueling concern whether consumers will forgo more-expensive foods.
A continued rise in feed costs next year “places even greater importance upon consumption for pork in order to keep margins high enough and producers profitable enough” said Mike Zuzolo, president of Global Commodity Analytics & Consulting LLC, in Lafayette, Ind.
“Otherwise, without continued strong consumption keeping hog prices strong, I fear another round of liquidation in hogs possibly as early as early 2011,” Zuzolo said in an e-mail today.
Friday’s report probably will underscore the outlook for tight pork supplies through much of 2011, said Rich Pottorff, chief economist with Doane Advisory Services. U.S. frozen pork stocks at the end of August totaled 384.9 million pounds, down 27 percent from a year earlier, according to a USDA report yesterday.
Pottorff expects a “modest” year-over-year decline in hog farrowings during the current quarter and little change in the next quarter.
“If producers follow through with that hog supplies and pork production will be above year earlier levels by the second half of next year,” Pottorff said. “However, if corn prices continue to rise, actual farrowing may come in below intentions in the Friday report, resulting in smaller hog supplies next year.”
In another key USDA figure, the market hog inventory as of September fell 2.9 percent from 60.84 million head a year earlier, according to the Reuters survey.