December Hogs & Pigs Report: Friendly but Ominous
USDA’s quarterly Hogs and Pigs Report released December 23 was friendly for Lean Hogs futures next spring and summer but included productivity figures that confirm my concerns about supplies and high slaughter capacity utilization next fall.
The key national numbers in the report were reasonably close to averages of analysts’ pre-report estimates. As can be seen in Table 1, there were only a few differences of more than 1 % implying that the report will not drive large changes in futures markets. The lower-than-expected numbers of pigs weighing under 120 pounds were the most bullish numbers and spring and summer futures were indeed higher in late-day trading on December 23 and 24. That support will hold, we think, and keep summer hog prices in the mid- to upper-$70s (per hundred pounds (cwt) carcass weight). We may still see a few $80-plus hogs next summer.
The inventories of all hogs and pigs (68.299 million) and market hogs and pigs (62.297 million) were record large on December 1. The former breaks a record set on September 1, 2008. The latter breaks a record set just last quarter.
The breeding herd grew by a modest 1.1% from its year-earlier level. The December 1 inventory of 6.002 million head marks the first 6-million plus figure since December 2008.
The farrowing/farrowing intentions rate continued its recent downward trend. See Figure one. We acknowledge that last year’s year-on-year reductions were due in large part to unusually high farrowing rates in 2014 when producers overbred in response to PEDv challenges the prior year. However, the rate implied by the Dec-Feb intentions in this report of 47.3% is the lowest since early 2006. Higher weaning ages were once a driver of this trend but that change is largely over so the reason for the continuing downtrend is still somewhat of a mystery.
The average for pigs saved per litter set another new record of 10.53 in the Sep-Nov quarter. See Figure two. This key productivity factor has now recovered from the PEDv hit it took in 2013 and 2014 and has grown at a 2.9% annual clip over the last five quarters with three straight record quarterly figures. The forecasts shown in Figure 2 represent average year-on-year litter growth of 1.9% for the H1- 2016, the period during which H2-2016 slaughter hog supplies will be born. Our forecasts assume 2% year-on-year growth for H1- 2016 litters.
The report suggests that we will see record-large hog slaughter in 2016 and makes a capacity squeeze next fall are very likely. The annual record is not a certainty as it will be nip and tuck whether 2016 sees more hogs than were slaughtered in 2008. The capacity situation in Q4-2016 may be serious.
As can be seen from Figure 3, the record kill of 2.493 million head the week ending December 19 exceeded total slaughter capacity as was determined by our survey last June. Weekly “capacity,” though, can be altered by adding a few hours or some Saturday shifts.
This USDA report does imply that several weeks will be at capacity next fall. The new plants in Michigan and Iowa will not be running until 2017 so Q4-16 will be the critical period.
We are assuming for now that large supplies will have the expected negative effect on prices but that capacity restrictions will NOT exacerbate those pressures. That assumption will be under constant scrutiny from here forward. We believe the risk of prices lower than our forecasts in the fall of 2016 is very, very real.
We expect average slaughter weights to be very similar to this year with some slight variations across the quarters. Our forecast is for weights to be 1% lower in Q1, fractionally lower in Q2, fractionally higher in Q3 and then 1% larger next fall. The net impact is to leave production changed by the same amount as slaughter for the year.Our price forecasts appear in Table 2.
Bottom Line: Pretty much an “expected” report that leaves 2016 hog numbers and prices pretty much the same as this year. The threat of capacity challenges in Q4-2016 is more real than ever.