February 19, 2010

Canadian hog producers continue to cull sows faster than their US counterparts, according to recent government statistics from Canada.

JP Morgan analyst Ken Goldman sees that as marginally positive news for companies like Smithfield Foods.

In Canada, the number of farrowing sows fell by nearly 8% in the three months ended in January, compared to a 5% decline a year earlier. By comparison, in the three months ended in December, 2009, US sow farrowings fell by less than 2%, compared to a nearly 5% decline a year ago.

"This report is marginally positive for hog farmers such as Smithfield, as it indicates that despite tough competition, Canada continues to cut its herd at an accelerated pace," Goldman wrote in a note to investors.

The Canadian pig crop is roughly 25% the size of the US crop, which Goldman said is big enough to make a difference in total North American supply.

He also noted that litter sizes are not climbing as quickly in Canada, where the average litter size is up only 0.6% on-year compared to the US litter size, which rose 2% during roughly the same period.

Goldman concluded that hog supply will be down "meaningfully" this year, but not by the 10% that was hoped for. "The burden thus falls on demand remaining robust in export markets such as Mexico. We have no reason to believe that demand will decline (and data show continued strength); however, this is a difficult driver around which to gain confidence," he noted.