Some analysts think the North American hog backlog is easing, but others think producers should prepare for the situation to worsen
Prices are a lot better today, but the always-alarming fourth quarter awaits hog producers.
With the COVID-19 pandemic expected to carry on for months, now might be the time to take some price protection.
“We’re definitely advocates for pricing a third of your production, all the way out to… the summer of next year,” said Tyler Fulton, the director of risk management for Hams Marketing.
“Cover a certain portion of your animals because you know there’s this uncertainty out there.”
Prices have recently risen to more than US$64 per hundredweight on the CME Lean Hogs futures contract, far above the $52 levels that hurt farmers over the summer.
The situation was far worse in Western Canada early in the pandemic, with packer shutdowns in Eastern Canada and the U.S. Midwest causing cash prices to crash to far beneath break-even levels.
Now prairie hog producers are able to lock in prices for the next few months of about $175 per pig because of the counter-seasonal rally that has brought farmers back to profitability.
“That’s better than a break-even and it’s something we haven’t seen for the last three or four months,” said Fulton.
The packer shutdowns backed up hogs on farms across the continent. That forced farmers to hang on to pigs longer and caused some to euthanize piglets and delay bringing in replacement sows and feeder pigs.
Those phenomena showed up in the U.S. Department of Agriculture’s Sept. 24 Hogs and Pigs report. It found an increase of 9.8 percent of plus-180 pound pigs, while young pig numbers fell 3.5 percent on U.S. farms. U.S. farrowing also fell.
That would seem to offer relief from the ever-present fear that the fourth quarter would see packer capacity exceeded, which would cause a price collapse.
However, the Daily Livestock Report is skeptical that the U.S. herd is shrinking as much as some believe.
If the USDA numbers are right, “producers still face a significant backlog and it is unlikely to go away this fall…. Based on survey numbers, not only is it not possible to bring down the backlog, but we may end up adding to it,” said the DLR.
“Alternatively, you can believe that the numbers are not real, that the survey does not matter and forecast based on spot market. There’s plenty of people out there that make weekend plans by looking out the window on Tuesday.”
However, many market bulls remain. Jim Long of Genesus thinks the rally is based on a reality of sharply smaller U.S. herds. U.S. carcass weights are smaller than a year ago, rather than bigger, as USDA numbers would imply they should be.
“So much for hogs being backed up,” said Long in a Sept. 24 commentary.
“Hog weights don’t decline if hogs are backed up…. Pig buyers (are) resisting paying more, but reality of supply and demand will lead to continual price increases in small pigs over the coming weeks.”
Some of the market’s bullishness comes from the discovery of African swine fever in Germany, leading to that country’s pork being banned from China.
China has an enormous shortfall of pork due to its ongoing ASF outbreak, which has led to millions of sow losses and tens of millions fewer hogs.
That leaves the world’s remaining ASF-free exporters, including the U.S. and Canada, to fill Chinese demand. German pork can still be sold across Europe, with other European Union exporters able to ship to China, but those product switches can’t be easily or quickly made.
“With Germany out of China’s import market, the U.S.A. and Canada should see significant benefits,” said Long.
Farmers across North America have suffered financially over the past year. The DLR estimates that only two months of the past 12 have brought profitable prices to U.S. producers.
Fulton thinks producers need to take some risk off the table now, because the pandemic could lead to more packer disruptions this fall and winter. There isn’t enough spare capacity to handle any significant slowdowns.
“It’s tight,” said Fulton, fearing the impact of another shutdown like the one at the slaughter plant in Sioux Falls, South Dakota.
“If we were to see that again, a plant of that size shut down, we’d have several weeks of a backlog.”
To him, it’s a no-brainer to take some price protection now, and he’s pleased that lots of independent producers appear to think so too.
“Guys are jumping on it,” said Fulton.