April 21, 2008

 

US needs 10 percent cutback in pig breeding to boost prices

 

 

US hog slaughter, already running at a record high through the first 15 weeks of 2008, compounded by oversupply last year, has to be reduced by 6 to 10 percent to bring hog prices to projected breakeven point, market analysts said.

 

The greater supplies also are met by high feed costs as corn and soymeal prices soar. The high feed costs combined with low hog prices put producer losses at US$30-US$35 per head during that period.

 

Prices have rebounded in the past two weeks, but producers are still losing money, analysts said.

 

The USDA reported that as of March 1 the swine breeding herd totaled 6.138 million head, up slightly from 6.110 million head a year ago.

 

This indicates that in order to achieve a 6 percent to 10 percent reduction, 368,000 to 614,000 more female hogs would have to be culled, analysts explained.

 

Although slaughter hog prices have recovered about US$11 per hundredweight, or 23 percent, from a cycle low hit March 21.

 

Prices would need to climb about US$14 more to cover the projected cost of production based on current corn and soymeal prices.

 

Market observers said that culling of the breeding-herd is underway. Actual slaughter data from the USDA for the latest three weeks ended March 29 show sow slaughter averaged 9.6 percent above a year ago.

 

Glenn Grimes, agricultural economist at the University of Missouri, said the gilt percentage in the slaughter mix has also risen, which indicates producers are cutting back the size of their breeding herds. The industry is in liquidation, but it is too early to know yet how fast the reduction is occurring, he said.

 

The March hogs and pigs report showed that producers had not begun liquidating sows, despite suffering severe losses during the winter. More hogs than expected were seen in the report, weighing on prices, which has contributed to the start of liquidation in recent weeks, analysts said.

 

Grimes said the US pork industry needs to reduce the breeding herd by about 10 percent in order to pull barrow and gilt prices up to a yearly average of US$61 on a live basis.

 

This price is the calculated breakeven price based on US$6 per bushel corn and US$350 per short tonne soymeal, which is about where Chicago Board of Trade grain prices are trading.

 

Market analysts said US$60 live hog prices were once considered a high-water mark and when achieved served as a signal for producers to become active sellers. With grain prices likely to hold at record highs, US$60 or higher live prices are needed to cover the cost of production.

 

Dan Vaught, an analyst at Wachovia Securities in St. Louis, said drastic cutbacks, far beyond what might normally occur in the hog industry, are needed to return producers to profitability.

 

Vaught added that the US pork demand will likely be strong through the second and third quarters of this year, but he is concerned that sales to China/Hong Kong could turn slower by the fourth quarter.

 

China is working to increase its swine herd after suffering losses from disease and a severe winter, and it may need less US pork by the end of this year, he said.

 

He projects first-quarter 2009 pork production to be down 3.6 percent from 2008, which would mean that output for the balance of the year would have to drop by 6.8 percent to achieve a 6 percent annual decline.

 

In order to achieve that amount of reduction in pork production, a combination of lighter average weights, fewer imports from Canada, and cutbacks in US breedings must occur, Vaught pointed.