Commercial pork production is expected to be 26.9 billion pounds in 2018, 5.2% above a year ago. This forecast represents an increase of 25 million pounds from last month’s forecast and is due to higher than expected dressed weights of slaughtered hog carcasses.
This upward revision is notable because the pace of slaughter so far this year has been slower than expected. Higher carcass weights have more than offset lower than expected slaughter numbers. The figure below shows weekly averages of daily carcass weights for federally inspected slaughtered hogs. A number of factors likely explain the year-over-year higher weights registered so far in 2018. First, despite recent feed price increases related to South American weather events, costs of feeding hogs—which typically constitute more than half of production costs—remain moderate, and producer returns in the first 2 months of the year have been positive. Further, winter weather conditions in principle hog production areas have not been unduly harsh. In addition, most packer pricing grids tend to favor heavier carcasses, which drive down processing costs.
Apart from these factors, two additional elements, related to the recent expansion of Midwestern processing capacity, may help to explain higher first-quarter dressed weights. The first is likely a timing issue: although many sow farms are currently in multiple stages of start-up, hog-finishing capacity associated with the ongoing industry expansion—which requires far less complex facilities to site, permit, and construct— may be running ahead of sow farms’ current ability to supply pigs. This would leave excess finishing space, creating somewhat less pressure to market existing animal inventories.
This relative absence of “push-through pressure” is likely to disappear, however, once sow farms come online and begin to supply animals to finishing barns constructed for that use. A second factor likely contributing to higher dressed weights is the apparent ongoing tug-of-war between producers and packers to maintain processing margins. Margins have been under particular pressure since the increase in processing capacity late last year. There is anecdotal evidence suggesting that since early February, some packers have slowed slaughter rates and limited Saturday slaughters in efforts to boost margins, which started out the year sharply lower than a year earlier. Producers, for their part, likely have some added leverage with excess finishing capacity, which may allow more marketing flexibility. Weekly gross processing margins for January through the week of March 2 are shown below.
It is notable that processor margins have recovered since early February. Although both hog prices and the wholesale pork carcass cutout fell during the month, the decline in wholesale pork values was more than offset by lower hog prices. The figure below indicates that most of the February decline in the wholesale value of the hog carcass was attributable to lower belly prices. While belly prices remain below a year ago—when depleted stocks drove prices to record highs—prices into March are above 3- year averages. Belly prices are likely being supported by moderate cold stocks volumes and the year-over-year higher retail-wholesale bacon price spread.
Editor's Note: Mildred Haley is a researcher with the U.S. Department of Agriculture's Agricultural Research Service. She coordinates the Livestock, Dairy and Poultry Outlook report.