Max Supply & Trade Turmoil Underlies December Hogs and Pigs Report

Piglets baby pigs
( Sara Brown )

Thursday’s December Quarterly Hogs and Pigs Report came in close, but a little under what economists expected. (See coverage from the June 2018 and Sept 2018 reports.)

According to USDA’s count of all hogs and pigs on Dec. 1, 2018, total inventory was 74.6 million head, up 2% from a year ago, but down 1% from the Sept. 1, 2018 report.

The market hog inventory on Dec. 1 was 68.2 million, up 2% from last year, but down 1% from last quarter. 

The largest discrepancy between the USDA report and analysts’ projections came in the under-50-lb. category where the report estimated 21.599 million head, up 0.9%, compared with the 2.5% analysts predicted. 

The number of pigs kept for breeding came in at 6.33 million head, up 2% than a year ago, but down slightly from last quarter. 
 

Pork Supply Growth
With record production this year and record production expected for 2019, the pork industry has grown to the point that it is now producing as much pork as it can before hitting breakevens. 

In Farm Journal PORK’s 2019 Pork Outlook, Purdue University agricultural economist Chris Hurt says it’s time for the industry to ask itself if it should continue to produce pork at this increasing rate of growth. 

“We’ve been on a terror of increasing production in the range of 3% a year – that is more than we would generally expect the demand to grow each year,” Hurt says. “Demand typically grows about 1% a year – sticking close to population growth.”

USDA reports the sows farrowing during this period totaled 3.16 million head, up 2% from 2017. Analysts noted the number of pigs saved per litter came in at a record high of 10.76, but up only 0.02 from last year.

“This number is a little bit lower than anticipated,” says Jim Robb, center director and senior agricultural economist with the Livestock Marketing Information Center in Lakewood, Colo. “A long-term trend in these numbers has been a slowing rate of growth in recent years.”

Robb says there are many factors at work that could be attributed to this slowing rate of growth in number of pigs per litter, including production system changes, genetics, labor issues and weather implications when the sows were bred.

“It’s something to watch as we change production a little bit and the system evolves over time,” Robb says. “As we look ahead, this is a number to watch to see if this is a one-time event or something that perpetuates. In subsequent Hogs and Pigs Reports, this will be a subject we revisit.”

U.S. hog producers intend to have 3.11 million sows farrow during the December to February 2019 quarter, up 2% from the actual farrowings during the same period in 2018, and up 4% from 2017. Intended farrowings for March-May 2019, at 3.15 million sows, are up 2% from 2018, and up 4% from a year ago.
 

Tariffs and Trade
Uncertainty around exports and trade in 2019 remain on pork producers’ minds as 2018 comes to a close. Bob Brown, independent analysts in Edmond, Okla., says they haven’t seen a major change in U.S. pork markets so far because of what’s taking place in China with African swine fever and tariffs. 

The impact on certain pork products, such as ham sales to Mexico, have been greater than others this fall, says Altin Kalo, analyst with Steiner Consulting Group in Manchester, N.H.

“Hams have been stuck in that 50-cent area; last year they were well over 60 cents,” Kalo says. “That’s directly related to tariffs that Mexico has imposed. We rely on Mexico to buy about a third of all hams we produce in the U.S. We had to lower prices to a level that allowed us to move product there.”

Brown says there are a lot of moving parts when it comes to this issue of trade and supply. 

“Consider this – we’ve shipped as much pork to South America as we’ve shipped to China this year,” Brown says. “That’s a market we didn’t think about a few years ago. The balance sheet is very important.”

The biggest unknown on the balance sheet is the export piece and that will determine the price outlook, Brown says. 

“Right now, if you average all future prices on the board for 2019, they average $72.50. The current market is around $54, CME lean,” Brown says. “The market is already building in a pretty good rally. With corn prices being pretty flat, I think producers can still make some money next year, even with record high production.”
 

USDA Revisions
According to Robb, the revisions USDA made to pull the numbers down were in line with the slaughter data.

“The revisions were all to the negative side of things,” Robb says. “We've had a trend for many quarters now where USDA has tended to pull up the farrowing intentions, and they did not do that in this report. So that's a little bit different than what has been the trend over many quarters, but they did not change the farrowing intention number.”
 

Price Projections 
Kalo uses the Iowa-Minnesota hog price and predicts first quarter of 2019 to be around 61 cents per pound. He says he’s more bullish because of their outlook for exports for the remainder of the year. For second quarter, he projects 72 cents, and for third quarter, 74 cents. He believes fourth quarter will come in around 59 cents.

Brown’s projections based on the CME lean basis are 63 cents for first quarter, 72 cents for second quarter, 71 cents for third quarter, and 62 cents for fourth quarter. He expects future prices in the summer, especially, to be quite a bit higher than most analysts predict.

Robb uses the national weighted base price to make his predictions. He expects fourth quarter of this year to come in about $60.10 per cwt, down 4.7% year over year. For first quarter 2019, he’s at $62-64, down 7% year over year; second quarter at $68-71; third quarter at $63-67; and fourth quarter at $57-62. He says for the year, this is down about 2.5% on prices year over year on production that’s up about 2 to 2.5%.

“We were a bit surprised by the lightweight category increasing slightly less than 1% year over year, so we did make some production forecast adjustments based on this report,” 

The December 2018 Quarterly Hogs and Pigs Report is available online at  https://release.nass.usda.gov/reports/hgpg1218.pdf.

 

Related Articles:

2019 Pork Outlook: Trade Optimism and Runaway Supply

Will the Pork Industry Have a Better 2019?

Focus on What You Can Control in the Pork Industry in 2019

 
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