Hog futures prices are trending steadily higher into 2009 but don’t rule out the risk of a 1998-style “price disaster” in this year’s fourth quarter, says a University of Missouri agricultural economics professor.
In a recent market outlook paper, Ron Plain and colleague Glenn Grimes ruminated on the odds that the record hog supply ready to market in the late fall could overwhelm American processing capacity, especially if a major plant shutdown or accident occurs.
“If the U.S. (Department of Agriculture’s) June inventory report is correct, and no packer has a problem, we’re going to get through the fourth quarter all right,” said Plain.
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“Or, if the June report, like the three previous ones, has underestimated the pig crop and there was actually more pigs born in the second quarter than they estimated, then we could find a situation like the fourth quarter of 1998.”
That year prices plunged to $10 per hundredweight.
But the futures market doesn’t see it that way, Plain said, noting it is “very optimistic” about prices rising. Also, labour problems haven’t been an issue for at least 15 years, and there’s no reason to expect a fire at a major packing plant.
“We don’t expect a disaster, but we’d like to point out that we’re close enough to the edge of packer capacity that if something happened, we could have a real price disaster.”
In his market outlook, Plain noted that in the fourth quarter last year, taking out weeks that had a holiday, American plants slaughtered an average 2.36 million head per week. That is equal to 95.5 percent of the biggest slaughter week on record.
Based on the USDA hogs and pigs report, there will be 3.7 percent more American hogs to slaughter in the fourth quarter this year compared to last.
A saving grace is that Canadian hog exports to the U.S. are averaging 23,000 head fewer per week than last year.
Given that, Plain forecasts total U.S. fourth quarter slaughter will be up 2.64 percent over last year. That means packers would have to run at 98 percent of record capacity for most of the fourth quarter.
Kevin Grier, a market analyst at the George Morris Centre in Guelph, Ont., said Plain’s analysis is just a statement of the obvious with the record number of hogs coming to market in the fall.
“If there’s a processing glitch, then we’ve got big problems,” said Grier.
“It’s like saying if my car won’t start, I won’t get to work on time. He’s right, but so what?”
U.S. futures markets are painting a rosier picture for the final quarter of 2008 and even better for the first quarter of 2009, he said, although not good enough for Canadian producers handicapped by the high dollar and skyrocketing trucking costs.
Grier said his models and forecasting methods are unable to generate prices as high as the futures market, given the volume of pigs coming.
He noted that most of the momentum behind the buoyant futures is being driven by unexpectedly high U.S. pork exports, which some say is a temporary spike driven by preparations for the Olympic Games in China next month.
Grier doubted that link, however.
“I don’t know what the Olympics have to do with it,” he said.
Adequate slaughter capacity is critical for hog producers because, unlike cattle, they can’t be kept on feed for more than two weeks before losses start piling up.
“You could end up making up for it on higher prices, or not,” said Grier. “The window of opportunity there is small. It’s more like chicken; when they gotta go, they gotta go.”
Andrew Dickson, manager of the Manitoba Pork Council, noted prices quoted by Maple Leaf’s Brandon slaughter plant rise steadily into 2009.
“You can lock in right now for February delivery, $159 (per hundredweight). The price right now is $136,” he said.
Dickson said the lower Canadian hog export numbers this summer were not because of fears over U.S. country-of-origin labelling. It was related to “crazy talk” of $8 corn that left U.S. feeders unable to tap credit sources to fill their barns.
“They couldn’t pencil in a profit picture. If they couldn’t do that, the banks weren’t prepared to finance them.”
This caused some of the four million weanlings sent south yearly to back up in Canada, sparking a crisis two months ago that led to some mass sow euthanizations on Canadian farms, although most piglets found homes eventually, he said.
