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USDA Turns Up Larger Hog Inventories Than Expected

Report is a bit bearish for Monday's lean hog futures. Generally tightening beef and pork supplies should prevent major price retreat.

Published on: Dec 28, 2012

Friday afternoon's USDA Hogs and Pigs Report showed slightly larger numbers than traders expected on average in advance of the report. The report is a bit bearish for today's trade. However, tightening supplies of beef and pork exports that are believed to be holding strong will limit any many downside move.

USDA tallied the Dec. 1, 2012:

* All hogs and pigs inventory at 66.348 million head, 99.98% of a year ago vs. the average trade guess of 99.1%, though still below the top end of the guess range of 100.4%

* Hogs kept for breeding at 5.817 million head, 100.24% of a year ago vs. the average trade guess of 99.3%.

* Market hogs at 60.531 million head, 99.96% of the year-earlier figure vs. the average trade guess of 99.1%.

Report is a bit bearish for Mondays lean hog futures. Generally tightening beef and pork supplies should prevent major price retreat.
Report is a bit bearish for Monday's lean hog futures. Generally tightening beef and pork supplies should prevent major price retreat.

The key question going into Friday's report was whether producers have scaled back the reductions in farrowing plans that they indicated they had intended to make at the peak of the drought induced grain price rally in September. The data suggest that they have.

Since September, producers have had strong incentives to rethink earlier farrowing plans. One incentive is corn prices that have traded sideways to lower since September. For much of that period June and July 2013 hog futures traded near the century mark. Those prices were $18 to $20 higher than where December 2012 futures expired. The highest hog prices of the year typically come during seasonally tight summer supplies. Still, a good bit of the premium in the summer futures was linked to expectations of even tighter than normal summer slaughter supplies.

Sow slaughter rate retreats

Total sow slaughter and the slaughter of U.S. sows were sharply higher in September and early October. That dumped a ton of pork on the market. Plus it fueled thoughts producers were drastically slashing herd.

But sow slaughter has run below last year's level since mid-October. Slaughter of U.S. sows (total sow slaughter less sows imported from Canada) has been just over 3,000 head lower from September 1 through December 8 than it was in 2011.

Sows are only part of the story.  Based on data from the University of Missouri, gilt slaughter as a percent of total barrow and gilt slaughter has been down 0.3% this year versus last year. When combined with larger slaughter this year, that means the just over 100,000 more gilts were withheld from slaughter in 2012 — assuming that the pigs surviving to market weight are comprised of equal numbers of barrows and gilts. Logic says that the sow herd should have contracted. But it appears enough females were available to actually increase the herd slightly.

Pork producers have a well-established track record of boosting pigs weaned per litter about 0.1 pig year-on-year. Super high feed costs give sow unit managers tremendous incentive to maintain, if not accelerate that litter size growth rate. Pork production is likely to rise.

Farrowing plans provide more evidence

In September, producers indicated plans to farrow 2.850 million sows in September through November. From surveys USDA tallied actual September-November farrowings at 2.900 million hogs, up 50,000.

December-February farrowing plans show a similar pattern. Back in September, producers said they intended to farrow 2.821 sows during the winter quarter. Friday's report pegged December-February farrowing plans at 2.865 million, up 44,000 sows.

The data suggest producers are behaving rationally. They see softening feed costs and respectable hog prices in summer 2013 and beyond. That combination spells improved margins. They're gearing back up to cash in.

The next thing we would logically expect to occur is summer lean hog futures and beyond will soften a bit, trading at lower highs and lower lows. Still, tight beef and pork supplies will prevent any major price wreck.

USDA Turns Up Larger Hog Inventories Than Expected