September 30, 2002
HOG PRODUCER PANIC REAPS BENEFITS
The panic selling of sows and light weight market
hogs in July and August appears to have a silver lining as the breeding
herd has shifted into liquidation and market hog numbers will begin
to decline later this fall. As a result, the fears of insufficient
slaughter capacity and horribly depressed prices this fall have
eased. Hog producers will still have losses to face in coming months,
but they will not be nearly as large as was feared.
The source of the better news was USDA's September
Quarterly Hogs and Pigs report. The breeding herd was reported to
be down 1.7 percent as of September 1, following a slightly higher
inventory in June. The decline can be attributed to rapid liquidation
of sows in July (up 20 percent), August (up 17 percent), and September
(up 12 percent). During these three months, a total of 120,000 more
sows were slaughtered as compared to the same period last year.
Looking back to the spring, sow slaughter in the months of April,
May, and June was also 5 percent larger than during the same period
last year, representing an additional 40,000 sows.
Fewer sows meant that farrowings this past summer
were much lower than anticipated. In the June quarterly report,
producers indicated they would farrow 2 percent more sows in the
June-August period, but actually reduced farrowings by 1.5 percent.
As a result of the smaller summer farrowings, the inventory of market
hogs was also much smaller than anticipated. The number of pigs
that weighed 120 to 179 pounds, representing the bulk of October
slaughter, were up 3 percent. But slaughter of market animals should
begin to drop below year earlier levels in November, as the 60 to
119 pound inventory was down modestly. The number of pigs that will
come to market in roughly December to February were down 1 percent.
Producers indicated that they intend to continue
to reduce sow farrowings and thus market hog supplies into 2003.
Fall farrowing intentions were down 2.5 percent and winter farrowing
intentions were down 1 percent.
Marketing weights have also come down sharply and
are expected to help moderate pork supplies during the next 12 months.
The reason is high feed prices and low hog prices. The transition
to lower weights occurred in August. At the start of the month,
slaughter weights were nearly 1 percent above the weights of the
previous year, but dropped below year-ago weights by the end of
the month. Weights have moderated further in September, dropping
as much as 2 percent below last year, likely because of advance
marketings of market hogs. For the fall, weights are expected to
remain slightly under those of last year, but can be expected to
increase with higher hog prices into the winter. For the next 12
months, weights may be up only about .4 percent.
The hog price tone should improve immediately with
prospects for less pork than had been anticipated. Still, pork production
in the fourth quarter of 2002 and first quarter of 2003 will likely
be nearly unchanged from production in the respective quarters in
the previous year. However, by the spring and summer, supplies are
expected to drop by about 2 to 3 percent. For all of 2003, pork
production should be down about 2 percent.
Fall prices for 51 to 52 percent lean hogs are
now expected to average in the $30 to $34 range. This is a substantial
improvement over mid-to-higher-$20 discussed before the report.
Prices should improve to the higher $30s in the winter and keep
marching higher into the spring, when they are expected to average
in the low $40s. Summer 2003 prices may reach the low-to-mid $40.
Because of the rapid liquidation, financial losses
are not expected to be nearly as large as feared prior to the report.
Total costs are currently estimated in the $39 to $41 range and
have declined somewhat with moderation in corn and meal prices since
the September 12 USDA grain updates. Losses in the third quarter
just completed are estimated at about $20 per head, but are expected
to be somewhat larger for the last quarter of the year, at $22 per
head. However, by winter, losses should be reduced to about $5 per
head. There is potential for a return to breakeven by the spring
and some profits by summer. Lower feed prices by the fall of 2003
could drop costs back into the higher $30s.
Producers are breathing a sigh of relief. Losses
are still going to accumulate this fall and early winter, but they
are not going to be nearly as severe as had been anticipated. A
return to break evens can be anticipated by early spring, with some
positive returns by late spring and summer. If additional sow liquidation
occurs this fall and winter, hog prices should be strong in the
last-half of 2003 and into 2004. For now, producers should calculate
their variable or "out-of-pocket costs" and continue to
produce hogs this fall as long as they anticipate they can recover
these variable costs. In general, most will continue to keep animals
in inventory, but they should trim their least productive animals,
keep market weights moderate, and continue to evaluate their longer-term
strategies in this changing industry.
Issued by Chris