February 25, 2008

 

Record US Hog supply in Q4 may challenge packer capacity

 

 

Fourth-quarter 2008 hog supplies could exceed the record large numbers in 2007 and challenge the packing industry's capacity to process them, said an agricultural economist.

 

Ron Plain, agricultural economist at the University of Missouri, said he expects sow farrowings during the first half of this year to be up slightly from a year ago, which along with a normal increase in productivity of about 0.7 percent per year could put the fourth quarter slaughter up by 1 percent or more from 2007.

 

When supplies exceed processing capacity, prices come under even more pressure, such as in 1998 when the Midwest cash hog markets fell to a low of US$10 per hundredweight for a weekly average and to US$8 for a day or two. The breakeven cost then was around US$38 to US$39, but the high corn and soymeal prices are resulting in a breakeven now that is over US$50.

 

Plain, who spoke during a panel discussion at the US Department of Agriculture's Agricultural Outlook Forum, said based on the consistent year-on-year increases seen in slaughter so far in 2008, he predicts first quarter slaughter to be up about 10 percent from a year ago. He also looks for the sizeable increases to continue into the second quarter.

 

Higher feed costs and significant producer losses, with prices expected to be below breakeven levels most months of the year, should result in enough sow liquidation to reduce slaughter supplies into 2009, he said.

 

Smithfield Foods, the nation's largest hog producer and pork processor, said earlier this week it would trim its hog breeding herd by 40,000 to 50,000 head, or about 5 percent. The reductions will begin immediately but will take several months to be completed.

 

Canadian hog producers have been severely hurt by higher feed costs and the strong Canadian dollar. They began reducing the breeding herd in September 2007, and the Jan. 1 sow inventory was reported down about 2 percent from a year ago, according to Tyler Fultonne, director of risk management for the Manitoba Pork Marketing Co-op. Further reductions are expected in the breeding herd by 6 percent to possibly as much as 10 percent by the end of this year, he said.

 

Producers have had negative returns since October, according to Iowa State University's calculated breakeven costs. Nearly four years of profitability led to increased production which in turn led to lower prices.

 

Farrowings are expected to be up about 2 percent in 2008, and with larger pig crops and live swine imports from Canada forecast to reach 10.8 million head, versus 10.0 million in 2007, pork production is projected to be up about 5 percent.

 

Hog prices on a live equivalent basis are projected at from US$41 to US$43, down from US$47.09 in 2007.

 

Pork exports are expected to increase for the 18th consecutive year and reach yet another record. After a slow start in 2007, pork exports expanded sharply in the second half to top the previous year's total. The weak US dollar, record large production and generally low prices contributed to the growth in exports, according to analysts and meat brokers.

 

Meanwhile, pork imports are expected to be 965 million pounds, down slightly form the 2007 total of 969 million. Smaller hog supplies in Canada, the largest supplier of pork to the US, will limit the amount available to be shipped in 2008.