Compared to last year, hog finishers are receiving higher prices despite an incredible surge of production.
The average finisher collected about $11 more per hog in late January 2004 than in January of 2003 even as 4.5 percent more hogs were slaughtered.
This improvement in demand was particularly stark during the fourth quarter of 2003.
Twice the price. During those three months (Oct. to Dec.) we slaughtered almost as many hogs as during the fourth quarter of 1998.
Despite this, prices in 2003 averaged about $37 per hundredweight while prices in 1998 average about $20 per hundredweight – nearly twice the price for the same number of hogs!
Beefed up. No doubt the drastic reduction in beef supply helped stimulate pork demand during the last half of 2004.
In a typical fourth quarter the U.S. hog sector produces about 25 percent fewer pounds of pork than the cattle sector produces pounds of beef.
This year pork production was only 8 percent lower than beef production due to both drastic beef reductions (12 percent below year previous) and pork increases (4 percent above year previous).
Predictions. The heavy fourth quarter production in hogs was not predicted by market observers – predictions based upon USDA numbers released in September 2003, all pointed to significantly lower output.
USDA substantially revised some of these numbers in their December report after slaughter levels soared.
In particular, they substantially increased their estimates of the productivity of the U.S. sow herd.
Efficient. Evidence from a prominent swine record keeping company suggests another, alternative explanation for the unexpectedly high slaughter: efficiency in the finishing sector.
That is, estimates suggest drastic reductions in hog mortality rates during the last half of 2003.
If this sample of hog finishers is representative of all hog finishers, it suggests that increased hog slaughter came not from a larger, uncounted sow herd or a larger, uncounted pig crop but from increased survival by hogs during the finishing phase.
Sow herd. A critical number in the December USDA report was the size of the sow herd: USDA counted a 62,000 more sows in December of 2003 than in September of 2003.
Some analysts are questioning the ability of the industry to expand sow numbers in the face of large losses incurred over the past two years.
In the 23 quarters since March 1998 there have been eight quarter-over-quarter increases in sow inventory.
The increase reported from September 2003 to December 2003 is the largest of all these reported increases.
The second largest increase was 51,000 sows, which occurred between September 2001 and December 2001.
At that time, net returns had been consistently positive for nearly 18 months.
Overestimation? Key state-level sow inventory estimates don’t seem to coincide with large, high-profile sow operations that are known to have exited.
The key question is: did USDA overestimate the U.S. sow herd in December?
If so, projections for 2004 are a bit too pessimistic.
Smithfield plan. Optimists also point to recent announcements by Smithfield that it will reduce its sow herd by 5 percent (35,000 sows).
Several North Carolina units that typically sell SEW feeder pigs to the Midwest will be depopulated and slaughter their sows, which will leave excess Midwest finishing space.
While such a move will strengthen prices by removing supply pressures, such a move is unlikely to be felt in the market until next fall, when the pigs normally produced from this cohort of sows would have been slaughtered.
Off the mark. For the moment, USDA inventory numbers from the December report seem to be slightly off with respect to predicting slaughter during 2004.
These inventory assessments that suggested that January slaughter would be just 1 percent larger than last year.
Even when adjusted for increased supplies of Canadian slaughter hogs, the projection for January was a 3 percent increase in slaughter. However, we saw January slaughter run 4.5 percent above last year, suggesting that USDA’s count may again be too optimistic.
Weights. Slaughter weights have not increased, however, leaving open the possibility that hogs are being pulled forward.
All this uncertainty surrounding the exact domestic supplies of hogs has left the futures market open to volatility, though recent prices have surged higher.
Feed prices hurt. Despite recent strength in prices, however, profitability is being threatened by higher feed prices.
For a typical finisher, corn and soybean meal costs have increased by nearly $7.50 per hog, or about $1.40 per hundred pounds of live hog marketed.
For those who no longer produce their own corn and soybeans, this could be a major drain on the narrow margins expected for 2004.
The silver lining is that higher feed prices should help keep hog weights down and limit supply pressure in this regard.
(The author is an Ohio State University agricultural economist.)
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