The USDA March Hogs & Pigs Report turned out to be pretty much what analysts had predicted: All hogs and pigs were up 3% from a year ago; breeding herd inventory was up almost 2% from last year; and the market hog inventory was up 3% from last year. The December-February pig crop, at 32.3 million head, was up 4% from 2017.
Record highs were established for all hogs and pigs, at nearly 73 million, and for number of market hogs, at 66.708 million.
Producers continue to build the breeding herd based on new packer capacity, says John Nalivka, President of Sterling Marketing in Vale, OR. “At the same time, packer margins have weakened a little from a year ago, the opposite of what we saw in Jan. and Feb.,” he says.
In addition, pigs produced per litter increased again in this quarter, points out Dan Bluntzer, Partner and Director of Research at NFC Markets, Corpus Christi, TX. “This is the third straight quarter of more than a 1% increase,” Bluntzer says. “An increase through the end of the year is solidified.”
Bluntzer adds that this is the first time in three years that the breeding herd has increased from Dec. to Mar., “so there are no holes in the hog supply.”
Kevin Bost, President of Procurement Strategies, Des Plaines, IL agreed with the other two analysts. All three participated in a teleconference sponsored by the National Pork Board immediately following the report’s release.
“The trend is obvious – the herd is still growing and it probably will until producers start losing money,” Bost says. “A year over year increase in the kill will grow by 3% to 5% through the end of 2018.
The large supply underscores the importance of the export market for U.S. pork as well as domestic demand for pork products, Bost says.
The grains reports released on Thursday are “kind of shaking up expectations for carryover,” Bluntzer says. This might slow hog herd expansion depending on what grain prices do. In addition, he says there’s no shortage of beef for the next 120 days.
“There’s plenty of protein to go around in the near future,” he says.
The other issue to watch is labor at the packing plants. Nalivka says with the Triumph Seaboard plant expanding to a double shift, and the Prestige plant coming online, the problem isn’t going to be shackle space – it’s going to be getting enough employees in the plants.
“It’s going to continue to put a squeeze on them,” Nalivka says. “The [pig] numbers aren’t going to outpace capacity but the problem is labor.
When asked about a possible issue with exports to China, none of the analysts seemed overly concerned, because at this point, there are just too many variables. Pork can still go in through Hong Kong, and with Smithfield being owned by the Chinese WH Group, it’s unknown how any additional tariff will impact a Chinese-owned company. Plus, U.S. pork is in demand in other markets, though the analysts point out that if NAFTA were to go away, that would be a major concern.
Manage Your Risk
Large operations are likely hedging production and managing risk, but in volatile times, all producers need to take advantage of market opportunities. The added packing capacity should be able to handle the increased numbers, the analysts say, but producers who do the best at risk management will reap higher rewards.
“Manage risk, hedge corn and meal and look at CME futures,” says Bluntzer. “Prices might look pretty attractive even after having fallen. In my view, we’re in that cyclical period where demand can evaporate in front of our eyes, especially when we consider competing meat.”
Nalivka agrees: “Control input costs and hedge the output prices,” he says. “Biting the bullet and taking protection is a good idea. A month ago, the $70 that the board was showing for April hogs didn’t look too hot, but now it does. We’ve kind of forgotten just how vulnerable the market can be.”
Nalivka, Bost and Bluntzer gave their market projections for the rest of this year:
- Nalivka (using Western Corn Belt and a premium): Q2, $63; Q3, $66; and Q4, $51
- Bluntzer (using the CME lean hog index): Q2, $68, Q3, $69; and Q4, $56
- Bost (using the CME lean hog index): Q2, $72; Q3, $75; Q4, $60