The good news is that hog farmers probably don’t have to worry about finding buyers for pigs this fall.
The bad news is that there’s not much reason to hope for substantially higher prices.
“We’ve still got to sell the pork,” said Hams Marketing’s Tyler Fulton when looking at the combination of low hog prices but solid and growing packer demand.
“We’ll move it, but at what price?”
A fleet of new packing plants in the United States is matching the increase in hogs going to market, and those plants will be increasing production throughout the last quarter of 2017.
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The U.S. Department of Agriculture forecasts that fourth quarter pork production will top seven billion pounds, an unusually large increase of 5.7 percent over the same quarter in 2016.
The fourth quarter of every year is white-knuckle time for hog producers because it is then that the market-ready supply of pigs can exceed packer capacity and collapse prices.
Hog supply rises because the cool fall weather is ideal for growing pigs. They hit market weight as packing plants wind down for the holiday season.
Unlike in most other agriculture industries, most hog producers can’t hold onto their commodity if there is a temporary oversupply. They need to ship as soon as pigs are fattened because incoming younger pigs need the barn space. Most pigs are shipped no matter what, so prices can quickly tumble.
This fourth quarter is likely to see newly opened slaughter plants in Iowa, Minnesota and Michigan steadily increase production to near maximum output at 20,000 animals per day from a combined rate today of about 5,000 per day.
“The trajectory of that build-in capacity has us not really concerned about our ability to get the hogs slaughtered,” said Fulton.
Jim Long, president of Genesus, a genetics and analysis firm, noted the security the larger packer capacity offers producers.
“The extra capacity should support producers and the hog prices they receive,” said Long, estimating an average of US$55 per hundredweight.
It could have been a lot worse.
If any of the plants had failed to come online in time, pigs supplies could have backed up. U.S. farmers are producing about three percent more pigs at this time than a year ago.
“If we had seen any delays we could be facing serious concerns,” said Long.
U.S. farmers appear to be still increasing production, but another packing plant is set to open next year, so it should be some time before slaughter capacity is reached.
Packers have been keen to kill every pig they can because of fat margins.
“They’re still dealing with massive margins,” Fulton said.
“Every packer has an incentive to be going gangbusters.”
However, that incentive will likely soon weaken, Fulton said, with the new plants and flaccid export demand keeping packing demand strong but pork pricing power poor.
Something will have to give, and Fulton thinks it will be packer margins. They won’t want to reduce production, but they won’t be able to demand strong prices from export buyers.
“We’ll see those packer margins cut to a fraction of what they are now.”
In a recent conference call with investors, a Hormel representative said the increasing number of pigs coming to market should remove pressure on packers to outbid each other for hogs.
Hog futures on the Chicago market have been disappointing for producers for a long time. They haven’t risen above US$93 per cwt. since October 2014, and have generally traded in a $53 to $83 range. There has been price support around $60, but recently, futures fell lower than that, to $56 on Sept. 23.
