January 4, 1999
HOPE SHINES FROM HOG REPORT
The December hog inventory report
from USDA suggests that the huge, price depressing slaughter rates
will soon begin to let up. This is welcome news for hog producers
suffering the worst financial period since the great depression
of the 1930s. The industry had trimmed the size of the breeding
herd on December 1 by 4 percent, and even greater liquidation
is expected this winter. This will drive pork supplies down by
the fall of 1999.
The depression era prices are the
immediate concern. Numbers from the report indicate some improvement
in prices over the next several weeks. The weight breakdowns from
the report indicate that the number of pigs weighing 180 pounds
and over were up 8 percent. Since the survey was completed around
December 1, most of those hogs were slaughtered in December or
early January. The good news is that the 120 to 179 pound weight
category was up only 4 percent, indicating that the excessively
high slaughter rates should moderate by no later than mid-January.
February slaughter should be up only about 2 percent, and slaughter
for March, April, and May could finally be down by 1 percent.
Declines in the breeding herd were
noted throughout the Midwest. The herd was down 5 percent in Minnesota,
7 percent in Iowa, 9 percent in Missouri, 4 percent in Illinois,
2 percent in Indiana, and 5 percent in Ohio. Unfortunately, the
western and southwestern states continue to show increases in
the breeding herd, primarily because of sow units built earlier
this year. Oklahomas herd was up 17 percent, Colorado up
13 percent, Texas up 7 percent, and Utah up 9 percent.
Producers intend further cutbacks
in farrowings. Winter farrowing intentions were down 1 percent
and spring intentions were down 7 percent. If producers follow
these plans, pork supplies will begin to drop in the late summer
There is a concern that the report
did not fully account for the huge slaughter in November and December.
USDA raised the size of last springs pig crop, but not nearly
enough to justify the November-December slaughter. The concern
is that more sows were in the herd last spring than USDA has accounted
for. If so, the USDA could still be getting an undercount on the
breeding herd. The validity of this report will last only as long
as the slaughter supplies match the report numbers. If the rate
of increase in slaughter does not begin to slow by mid-January,
the market will be forced to reject the data as "another
bad inventory count." The consequences are that hog prices
could remain in the teens for several months.
The wholesale value of pork has
been high enough to have kept hog prices in the low to mid-$10
even in December. The dilemma was that supplies exceeded effective
slaughter capacity and packers did not have to bid for hogs. There
were so many hogs coming to market that packers could about name
the price they would pay. If January supplies do drop to only
4 percent above year-ago levels, packers will need to begin to
compete for the hog supply. This means that prices could quickly
rebound to the lower to mid-$20. February hog prices could push
toward the higher $20s with prices reaching the low $30s by March.
First quarter average prices at terminal markets may be near $29
per hundredweight. Prices can continue to improve as the year
progresses. Second quarter prices are expected to average about
$36, with prices in June in the high $30s. Summer prices are also
expected to average in the higher $30s, with low $40s expected
for the fourth quarter.
Prospects for improved prices are
welcome, but most producers still have at least four more months
of losses before they get back to breakeven. This means their
financial situation will continue to erode. Given the unimaginable
losses of $50 to $70 per head in the past two months, cash flow
is the number one priority for many. Most producers will ask their
lender for larger credit lines to accommodate losses. Lenders
in turn will ask for additional collateral to be pledged against
these larger credit lines. Some grain-hog farms will have land
to back larger loans, but others will not. This could lead to
what is called a "liquidity crunch," a period when lenders
tighten their requirements for loans at the same time producers
need greater borrowing capacity. In these situations, lenders
will make credit decisions on an individual basis. Most of those
who cannot garner greater borrowing capacity will be forced to
liquidate all, or a portion, of their herds.
The longer-term price prospects
remain optimistic. The breeding herd will likely continue to drop
through much of 1999, providing sharply smaller pork supplies
in 2000. World pork supplies will also be reduced, resulting in
smaller imports of live hogs from Canada and better export prospects.
In addition, retail prices will have been lowered with more product
Generally, the more severe the loses
experienced during a hog cycle, the stronger the profit period
in the next cycle. The severity of the current losses will discourage
expansion for years and may actually provide a longer period of
sustained profits in 2000 and 2001.
Issued by Chris