Breeding inventory surprises trade at nearly double average pre-report estimate.

Krissa Welshans 1, Feedstuffs Editor

June 29, 2018

5 Min Read
UPDATE: ‘Hogs & Pigs’ report a bearish surprise
Scott Olson

The U.S. Department of Agriculture released its quarterly “Hogs & Pigs” report June 28, surprising analysts with bearish numbers.

The U.S. inventory of all hogs and pigs on June 1, 2018, was 73.5 million head. up 3.4% from last year and up 1% from March 1, 2018. This is the highest June 1 inventory of all hogs and pigs since estimates began in 1964, USDA said. Analysts had expected a 3% increase in the inventory.

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The breeding inventory held the largest surprise at 6.32 million head, a 3% increase from last year and a 2% increase from the previous quarter. Analysts had expected only a 1.7% increase.

Market hog inventory, at 67.1 million head, was up 3.4% from last year and up 1% from last quarter. This is the highest June 1 market hog inventory since estimates began in 1964, USDA said. Analysts had expected a 3.1% increase.

The March-to-May 2018 pig crop, at 33.2 million head, was up 4% from 2017 and is the largest March-to-May pig crop since estimates began in 1970, USDA said. Analysts had expected a 3.4% increase.

Sows farrowed during this period totaled 3.12 million head, up 4% from 2017. The sows farrowed during this quarter represented 50% of the breeding herd. The average pigs saved per litter was a record-high 10.63 for the March-to-May period, compared to 10.55 last year.

According to the report, hog producers intend to have 3.17 million sows farrow during the June-to-August 2018 quarter, up 2% from the actual farrowings during the same period in 2017 and up 4% from 2016. Intended farrowings for September to November 2018, at 3.18 million sows, are up 2% from 2017 and up 4% from 2016.

The total number of hogs under contract owned by operations with more than 5,000 head but raised by contractees accounted for 47% of the total U.S. hog inventory, down from 48% the previous year.

Analysts’ reactions

During a conference call hosted by the National Pork Board, Dr. Ron Plain, professor emeritus for the University of Missouri, said the larger-than-expected numbers are going to be bullish and problematic for the industry moving forward.

“USDA’s past record on this report is fairly good,” he said. “We’re looking at a lot of pigs, coming from a report that has a pretty good track record. It makes me thinks that those numbers are probably right and the pigs are there.”

As for what this means, Plain said, “We’re looking at an awfully lot of hogs and an awfully lot of pork. Normally, increasing supply puts pressure on prices, and that’s likely to be the case. I’m afraid we’re going to look at a considerable number of months of red ink going forward.”

Difficult financial times for producers are ahead, and it will be interesting to see whether that translates into a cutback, he said, adding, “We haven’t seen much reduction in the hog inventory in quite some time.”

Joe Kerns, president of Kerns & Associates, said this is not another replay of 1998, when the pork industry compressed shackle space capacity relative to animal numbers.

What’s needed now is determining what value product needs to be sold at in order to clear product both domestically and through exports, he explained.

This is a prolonged downturn but not a sharp V-shaped bottom like what occurred in 1998, he said. Nonetheless, he added, “This is a very disappointing report for the pork producer as we look forward.”

Dr. Lee Shulz, associate professor at Iowa State University, said while the USDA report is “bad news” and will weigh on the market, the market will still offer some opportunities. “It’s important to take advantage of those opportunities when we do see them,” he said, adding that it’s really important for producers to get a handle on their cost situation and control it as best they can.

Regarding processing capacity, Kerns said the latest report is a strong signal that the industry needs new shackle space, so “thank goodness we have these new plants.”

He added, “We’ve had a bad situation, but it could have been significantly worse if it weren’t for the facilities under construction with the opportunity to move to a second shift.”

Producers seem to be determined to makes sure there are plenty of hogs for these new plants to harvest, Plain said.

Shulz referenced the capacity issues that the industry ran into in 2016 but said the industry has the ability to slaughter the large number of hogs the U.S. is currently producing with new facilities. While there could be small or short windows of issues as these new plants ramp up, which may put a little strain on the industry, he said they will be nowhere near the issues that occurred in late 2016.

Price projections

Plain forecasted prices using the Iowa-Minnesota negotiated carcass basis. For the third and fourth quarters of 2018, he projects prices to be $65-68/cwt. and $49-52/cwt., respectively. For the first and second quarters of 2019, he anticipates that prices will be $55-58/cwt. and $61-64/cwt., respectively.

Using western Corn Belt prices, Kerns said third and fourth quarter 2018 prices will be $72/cwt. and $48/cwt., respectively. He forecasts the first and second quarters of 2019 to be $55/cwt. and $64/cwt., respectively.

Shulz, using the Iowa-Minnesota negotiated carcass basis, forecasts third and fourth quarter 2018 prices to be $67-71/cwt. and $52-56/cwt., respectively. For the first two quarters of 2019, he projects that prices will be $58-62/cwt. and $62-66/cwt.

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