The June 1 U.S. Department of Agriculture hogs and pigs report released June 29 came in at the high end of expectations and could be considered slightly bearish, on the surface.
Some commentators use the report’s weight breakdown estimates to forecast marketings by the month. The idea is to estimate growth rates and forecast how the inventory count compares to reality.
It is also an effort to identify potential surges and lulls in supply and the influence on prices. These head counts by weight bracket are less accurate than total herd, breeding sow and pig crop numbers.
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If you focus only on the pig crop estimates, it is possible to forecast marketings over the next three months with better than 99 percent accuracy. Actual slaughter is almost always slightly higher than the USDA forecast, mostly due to hogs imported from Canada.
Canadian hogs make up about four percent of U.S. slaughter. So a 10 percent increase in Canadian exports, which is about the actual current rate, increases U.S. slaughter by 0.4 percent. Changes in Canadian export volumes can easily account for up to 80 percent of the difference between the USDA forecast and actual slaughter.
What about Canada?
Statistics Canada will release the Canadian July 1 hog inventory Aug. 16.
The April 1 inventory report released April 26 projected that the pig crop for October to December was 0.9 percent larger than the year before and the January to March crop was 1.8 percent smaller. That indicates production 0.9 percent higher than 2006 until the end of May and about 1.8 percent lower for June to August.
Canadian production so far this year is up 0.8 percent over the same period in 2006, which is close to expectations based on the hog inventory report. This figure includes weanling and market hog exports and domestic Canadian slaughter. Slaughter hog production this year is down 1.04 percent and weanling feeder exports are up 7.9 percent.
What is the impact on prices?
U.S. hog production looks set to hold about two percent over 2006 through this summer and fall. Production in Canada will drop 1.8 percent below 2006 starting in July.
Those numbers combined mean North American production in the second half will be about 1.5 percent higher than 2006. This is roughly in line with population growth and probably is manageable assuming steady exports and domestic demand.
The impact of circovirus vaccination is a wild card. Healthier vaccinated hogs could lead to a one to three percent supply increase by fall.
On the demand side, there have been several developments. Smithfield Foods on June 29 received an environmental permit allowing expansion to a second Saturday shift at its Tar Heel Plant in North Carolina. This doesn’t sound like much, but it adds one million hogs, or roughly 0.8 percent, to U.S. annual slaughter capacity.
Swift, recently purchased by Brazilian packer JBS, dodged a possible strike at its Marshalltown, Iowa, slaughter plant.
The new labour agreement provides higher wages and better benefits for its 1,900 workers. A strike could have caused a significant drop in hog demand in the U.S. Midwest and would have affected western
Canadian producers.
U.S. pork exports to the end of April fell one percent from 2006, the first sustained drop since 2003. This is due mostly to a 40 percent drop in Mexican business. This demand drop is still being debated, but it appears to be related to food price inflation probably sparked by ethanol corn demand, which is limiting the buying power of Mexican consumers.
The U.S. dollar continues to weaken and lean hog futures have fallen sharply since early June. This sounds negative, but there is a positive side. They likely will spark interest in pork exports and reignite hog prices over the next several weeks.
Pork producers also need to watch China. It produces and consumes more than half of the world’s pork. Disease has reduced its production. China may back out of some export markets to supply domestic needs and this could trigger a major export surge for North America.
Western Canadian prices
My guess is that most of the bad news has already been factored into the market and things are set to turn higher.
Brandon Sig 3 price in early July is $138-$140 per 100 kilograms.
The forecast for July and August: Maple Leaf Brandon Sig 3 price $144-$146 per 100 kg for July and $133-$143 for August and September. Fourth quarter prices are projected between $113-$128 per 100 kg.
This assumes the Canadian dollar at 94.38 cents US.
Kraut is a marketing and risk management adviser with Elite Swine. His column appears following release of the Canadian and American hog reports.
