USDA Report: Lots of pigs; not enough capacity

With record hog and pig inventories continuing to be the trend for 2016, a panel of industry analysts recently recommended producers consider looking to the futures market to lock in profits in late 2016 when supplies could exceed slaughter capacity.

U.S. inventory of all hogs and pigs Dec. 1 was 68.3 million head, up 1 percent from last December and the highest inventory on record since quarterly U.S. estimates began in 1988, according to the U.S. Department of Agriculture's fourth-quarter hogs and pigs report released Dec. 23.

The September-November 2015 pig crop, at 30.3 million head, was down 1 percent from 2014. Sows farrowing during this period totaled 2.88 million head, down 4 percent from last year, the USDA reported. The farrowing numbers for the quarter represented about 48 percent of the breeding herd. The average pigs saved per litter was a record high 10.53 for the September-November period, compared to 10.23 last year, the report said

"It's the third consecutive quarter that we have set records on pigs per litter," Dr. Ron Plain, extension economist with the University of Missouri, said.

Shortly after the USDA's quarterly report was released, Plain and other industry analysts dissected the numbers for media, via a teleconference organized by the National Pork Board.

The large number of pigs per litter is offsetting a declining sow herd, Plain said.

Kevin Bost, president of Procurement Strategies Inc., Chicago, said high weekly hog slaughter rates in fourth-quarter 2015 likely would be even larger in the final quarter of 2016.

"The average weekly hog slaughter, which by the way was a record 2.493 million (head) in the past week, should drop down to just short of 2.3 million in January," Bost said Dec. 23.

But after a seasonal bottom in May, Bost predicted the industry could be looking at record weekly slaughter numbers again in fourth-quarter 2016.

Pushing Market Capacity
"In November we're looking at average weekly kills in excess of 2.45 million and then in December about 2.53 million," he said. "I think what we're all kind of wondering about now is [in] fourth-quarter 2016, does the hog supply exceed the industry's slaughter capacity?"

The packing industry's slaughter capacity is estimated at 2.461 million head per week, though that number is not set in stone as evidenced by a record weekly slaughter of 2.493 million head set in late December, said Steve Meyer, vice president of pork analysis for Express Markets Inc. Analytics of Fort Wayne, Ind.

"We're very close to that capacity number and have been for three weeks now," Meyer said. "I think we are going to be at or above capacity for several weeks next fall [based on this USDA report]."

The nation's slaughter capacity isn't likely to increase in time to offset anticipated record numbers next fall, Meyer predicted.

"Two new large plants, one in Michigan and one in Sioux City, Iowa, are under construction, but they will not start slaughtering animals until the summer of 2017, so they won't be up and running until the fall of 2017," Meyer said. "‚... There are not going to be any big improvements in slaughter capacity that I know of between now and sometime in the summer of 2017."

Breeding inventory, at 6 million head, was up 1 percent from last year and slightly more than the previous quarter, the USDA report said. Market hog inventory, at 62.3 million head, was up 1 percent from last year and up slightly from last quarter, according to the report.

Watch Number of Sows
The number of sows farrowing, as a percentage of the breeding herd, in the quarterly report caught panelist Daniel Bluntzer's attention.

"The rate of farrowings was only 48 percent of the breeding herd. Last year it was 50.6 percent, so as the farrowing rate goes down it really takes a lot of hogs out of the mix," Bluntzer, a partner in New Frontier Capital Markets, Corpus Christi, Texas, said.

But the analyst said 48 percent is not typical, based on normal patterns.

"The longer term trend was for increases in the farrowing rate relative to the size of the breeding herd. Over the last couple of years we've seen that start to come down, with the exception of last year which likely had something to do with the PED (Porcine Epidemic Diarrhea) virus coming in," Bluntzer said. "So that was a number that really hit me.

Bluntzer, however, said he thought the farrowing projection might be low.

"Maybe you have to take [the USDA farrowing projection] with a grain of salt because that means a lot to the numbers coming out in the next nine months," he said. "But it was very surprising and it really does cut into those pigs per litter coming up if you've got fewer sows farrowing."

Operating in the Red
Though the panelists said producers are operating in the red now - well below an estimated break-even point of about $61 per cwt. for lean hogs - economists thought prices might be in the mid-$70s by summer before dropping to the mid-$60s in early fall and continuing to decline into late 2016.

"Looking at what happened to the cattle market in the past year, we can see what a really nasty market you can have if there's not enough capacity to go around ‚...," Bluntzer said, referring to slaughter projections for the swine industry next fall.

The economists said producers likely would try and secure some profit margins through the futures market late next year.

"These numbers imply we're going to have more hogs available in the fourth quarter of 2016 than in the fourth quarter of 2015," Plain said. "‚... Futures markets are offering higher prices in the fourth quarter next year than what we've had this year. So, yes, I would argue that pork producers ought to think about locking in some of that."

Bost agreed with Plain's assessment.

"I can only guess whether or not producers will be locking up prices into the end of 2016, but it looks to me like something I would want to do if I were raising hogs," Bost said. "Because you're looking at futures prices in October around $65 or so and December $61 ‚... with kill numbers like this, the cash market might be lucky to get $50 in the fourth quarter."

Though November data showed record margins, it wasn't for the producer, Plain said.

"It was post farm gate. For hog producers, they are in the red ink right now," Plain said. "One of the things that has helped tremendously in the last two or three years is lower feed costs have pulled that break-even down ‚... As is often the case, November and December are the two least profitable months of the year in the hog business, so it's not terribly surprising that they are losing money now, and it looks like they are going to do so for several more weeks."

Blunzter said the general rule of thumb for the industry is a price point of $60-61 for lean hogs on the CME index was considered the break-even mark. The Dec. 23 base price on the CME lean hogs index was $54 per cwt.

"We're definitely in the red right now," Blunzter said. "When you look at the summer months, we are sitting in the mid-$70s. You're not going to be profitable for 12 months. It is a cyclical market. I don't see these kind of losses worrying anybody [because of profit potential this summer]. Corn prices are relative low right now ‚... but you've got to remember the grain side of the equation as well."

Summer 2016 Looks Better
Bost also looked at the summer as an opportunity for producers to improve profit margins.

"Without expecting any really major improvements in wholesale pork demands, I think we are looking at a CME lean hog index of something in the upper $60s before the end of the first quarter and then something in the low $80s per cwt. from May through July or August," Bost said. "So, there will be a period of respite in terms of producer margins."

Projecting prices through 2016 on the CME lean hog index, Blunzter predicted $60 to $62 for the first quarter, jumping to $73 to $76 in the second quarter and then increasing to $75 to $76 in the third quarter.

"Depending on what the slaughter capacity does, $64 to $66 in the fourth quarter," Blunzter said. "Again, when you look at the production, you've got to factor in the feed costs we've had and the cattle market.

"This is not a one-meat show. There's going to be a lot of competition from beef the first half of the year," he said.

Bost viewed prices in similar fashion on the CME lean hog index.

"I think it will make its way into the upper $60s in February and March, headed toward a summer high that's probably in the low $80s - dropping back to somewhere between $65 and $70 in September," he said.

The fourth quarter will depend on slaughter capacity, Bost said.

"You're crossing over that threshold week after week of pushing more hogs at the packers than they can really handle on a practical basis," Bost said. "‚... that fourth quarter hog price could be very, very low."

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USDA, December 2015, Quarterly Hogs and Pigs report.