Time has come to reduce hog herds

WEST LAFAYETTE, Ind. – Hog numbers will continue to run higher than anticipated, dragging out the potential for losses until next spring, said a Purdue University Extension marketing specialist.
“If everything had gone as planned, hog producers would not be mired in the largest losses since late in 2002 when they were losing $25 per hog,” said Chris Hurt. “But, things did not go as planned.
The September Hogs and Pigs report from USDA indicated that slaughter supplies for October and November would be up about 3 percent. October slaughter was actually up 11 percent, and November slaughter, so far, has been up about 7 percent to 8 percent, he said.
All the hogs have come from sows and gilts that were farrowing back in the spring, Hurt said.
Undercounting. USDA counted sow farrowings as up by just 1 percent at that time. Pigs per litter added another 1 percent to those supplies, but the clear message now is that there had to be a major undercounting of sow farrowings and pig inventory dating back to last spring.
“High slaughter runs, pushing past capacity, have forced some Saturday kills and have depressed hog prices,” said Hurt.
In September, hog prices averaged about $47 for 51 percent to 52 percent lean carcasses on a liveweight basis. Those prices have dropped to $35 in recent weeks.
“High corn and meal prices have accelerated costs into the very high $40s and resulted in losses of an estimated $9 per hundredweight for average costs farrow-to-finish operations.”
Unfortunately, since slaughter supplies have run sharply above USDA numbers for two months now, one conclusion is that supplies will continue to run higher through the rest of this year and well into the winter, he added.
Time table. “This will keep the losses in the high single-digit range through the winter until the spring and summer seasonal hog price upswing is realized,” he said.
Given anticipated cash corn prices of near $4 next summer and meal prices near $300 per ton, costs are expected to be in the low $50s.
“It is expected that hog prices will not average above $50 for the spring and summer quarters, resulting in losses of $4 to $8 per head.”
The outlook is for continued large losses this fall and winter, then more moderate losses for spring and summer, before losses grow once more in the fall and winter 2008-2009. Price uncertainty for corn and soybean meal can be added to the grave concerns for hog producers over the coming year.
Herd reduction. “This outlook means the time is finally ripe for breeding herd cutbacks to occur in the first half of 2008,” said Hurt.
“The last time the industry had to cut back on the breeding herd was in late 2002 and early 2003. In that liquidation, the breeding herd dropped about 4 percent. A similar decline in 2008 may be required to bring the industry back to profitability into 2009.”
Reductions in the breeding herd may not begin to show up in the USDA inventory reports until June of 2008. This means reductions in pork supplies will not come to fruition until early in 2009. And that is if some industry liquidation gets underway this winter, he noted.
Some may argue that pork demand in 2008 will pull hog prices high enough to avoid an extended period of losses.
China. The argument that has the most credibility is that China will sharply increase purchases of U.S. pork as it attempts to moderate rapid food inflation.
“Cheap U.S. pork prices and the cheap U.S. dollar add credibility to that argument,” he noted.
“The China demand could add dollars to market prices quickly and single handedly reduce 2008 losses.”
On the other hand, he said, domestic demand has to be suspect as a factor to avoid losses.
“Leading the argument against a domestic demand bailout are the slow-growing and nervous U.S. economy and larger competitive meat supplies.”