COLUMBUS – While pork portrays itself as the other white meat, it is clear that the only saving grace of the fall market is the fact that consumers are treating pork as the other red meat.
With cattle prices 50 percent above last year’s prices and retail beef prices finally rising to compensate for this fact, pork is becoming of greater interest to the retailer and consumer.
Price support. What else can explain how the United States produced more pork in October of 2003 than during the disastrous December of 1998 while supporting prices higher than last year?
We are on pace to slaughter about as many hogs as the fall of 1998, but with prices in the mid-$30’s rather than in the low-$20’s.
While prices in the mid-$30’s cannot deliver profits to producers, prices in the $20’s would have been disastrous.
Watching the market. Most market watchers predicted the price about right for the fall but were about 5 percent too low on our projections of pork production.
The unexpected price is easy to link to the beef situation, but what about the bountiful hog slaughter?
Fall slaughter expectations are usually developed by taking last year’s slaughter as a baseline and then increasing or decreasing it by the year-over-year change in the reported market hog herd by size group.
For example, USDA estimated that the heaviest weight group (more than 180 pounds) was 5 percent smaller than year previous in its Sept. 1, 2003 inventory figures; hence, the expectation was for slaughter during September to be about 5 percent smaller than year previous.
Imports matter. This had to be adjusted for any changes in the number of slaughter hogs being imported from Canada.
In 2002 Canadian imports represented about 2 percent of weekly slaughter (about 35,000 hogs/week) while in 2003 this figure rose to about 65,000 per week.
So the 5 percent expected reduction in slaughter slips to about a 3.5 percent reduction in expected slaughter.
And that is about what actually happened in September: weekly slaughter was down about 4 percent for the first four weeks of September over year previous.
Using a similar process and accounting for the spurt in Canadian slaughter imports suggested the remainder of 2003 slaughter would be about dead even with last year.
Explain the difference. Instead we have seen weekly slaughter average 3 percent above year previous during October and November.
How do we explain the discrepancy?
The most pessimistic way would be to assume that we simply had a larger sow herd last March that produced a larger pig crop and that the sow herd was simply miscounted by USDA.
If this were the case (and accounting for imports of Canadian feeder pigs and the mild pace of sow slaughter) it would suggest the US breeding herd is actually 4.5 percent (273,000 sows) bigger than we thought.
This means pig crops not yet slaughtered and future farrowings will all produce larger supplies than we have expected, and could mean some retrenchment in the prices currently available on the futures markets for the winter and spring.
Optimism. The most optimistic scenario is that productivity hit a spurt.
But even with a record high rate of sow utilization (e.g., 48 percent of sows farrowing in the Mar-May quarter of 2003), record high sow productivity (e.g., 8.9 pigs per litter), and hogs finishing so fast that we have pulled one day ahead in terms of finishing times compared to last year (e.g., about 380,000 hogs), I still calculate that the sow herd would have to be 1.5 percent larger (88,000 sows) than reported.
I would expect the December USDA hogs and pigs report to include some type of revision of the size of the breeding herd of at least 1 percent, and I’m guessing the board has already built this into futures prices for 2004.
Futures prices. Any revision greater than 1 percent could cause some reductions in 2004 futures prices, however.
Currently those futures prices for lean hogs, corn and soybean meal are projecting a year with no profit for 2004.
For a typical finisher who sources 50 pound feeder pigs at cost, my models suggest net returns to be about $1 under break even for the next 12 months ($ per 100 pounds live weight).
Quarterly net returns above cash costs ($/hundredweight) on a quarterly basis are predicted as:
Battles. The battle for general price movements on the board over the next month will come down to a couple of factors.
First, will be the December Hogs and Pigs report (and leading private forecasts) with particular emphasis on any revisions in the sow herd size; potential of downward pressure on prices is likely.
Second, is the unfolding story of the strength of pork demand, both on its own and as a function of scarce beef supplies.
Only now are we seeing beefs price at retail really rise to its true level; pork and hence hog prices may continue to see some positive movement across all maturities due to this demand.
Open border? Finally, the Canadian situation may cool off a little as the border re-opening will slow the flow of slaughter cattle and as a more expensive Canadian dollar slows the flow of all Canadian product to the United States.
For example, last year you could buy 1.55 Canadian dollars with $1; this year only 1.3 Canadian dollars, or about a 20 percent increase in the price of Canadian goods.
(The author is an associate professor of agricultural, environmental and development economics at Ohio State.)
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