Supply Outlook: Fewer Sows Farrowing than in 2014 and 2015? - Part 2

Few people raised their hands in the packed room at the 2023 World Pork Expo when Lee Schulz asked, “Who thinks we still have a hog cycle?” Schulz, an associate professor in the department of economics at Iowa State University, still believes there is a hog cycle, and he has the charts to prove it. He points to several factors that figure into a cycle: 

Profitability: Pork production is a competitive industry. That means long-run economic profits will gravitate toward zero. Producers will expand when they expect profits. Losses will trigger contraction. That is the hog cycle. Profitable returns to hog production the last two years, albeit modest in 2022, brought about higher production levels that have been realized so far in 2023. Current levels of risk, uncertainty and input costs have producers pulling back.

Biological lags: “The pork consumed today is based on producer decisions made 10 to 18 months ago,” Schulz says.

Asset fixity: “Producers have a tendency to continue to produce during low hog prices when asset (production facilities) values at acquisition and salvage are markedly different,” he explains.

Asset specificity: “Producers have a tendency to continue to produce during low returns when transition costs of converting assets to alternatives uses exceed the value of the current use,” he adds.

The federally inspected hog slaughter verifies the trend. Year-to-date overall slaughter numbers in 2023 show modest growth (1.3%) over 2022 levels but those numbers will cool in the second half of the year, says Schulz, with a further reduction predicted in 2024. 

Farrowing Numbers

In March 2023, USDA asked producers for updated March-May farrowing intentions. Data collected for the Hogs and Pigs survey reflected market conditions in the weeks leading up to and the first half of March 2023. 
“Much of the pessimism in the hog market had yet to take hold,” says Schulz. 

U.S. hog producers said they intended to farrow 1.2% fewer sows during the March-May quarter this year than they did in 2022 and 3.4% fewer than the same period in 2021. If producers do not change intentions, this would be the smallest March-May sows farrowing since 2015. Intended sows farrowing for June-August 2023 would be down 2.9% from the actual sows farrowing during the same period in 2022. This would be the smallest June-August sows farrowing since 2014. The next USDA Hogs and Pigs report, scheduled to be released June 29, will provide updated estimates and help gauge the ongoing contraction in the industry, says Schulz.

Carcass Weights

Hog weights remain below year-ago levels, especially weights of producer-owned hogs. Based on the USDA Agricultural Marketing Service National Daily Direct Hog Prior Day Report - Slaughtered Swine (LM_HG201), producer-owned hogs during the last week of May averaged 210.07 pounds per carcass, and are the lightest for this time of year since 2013. Packer-owned hog weights averaged 218.25 pounds for the same week and are only below last year’s record levels and in 2020 when hogs backed up on farms due to COVID-19 related disruptions. Packers may be holding on to their hogs longer given they can buy hogs cheaper on the open market than they can raise hogs themselves,” said Schulz.

“High feed costs and suppressed hog prices provide no incentives to feed hogs to heavier weights,” explained Schulz. Reduced dressed weights lead to less pork being available, which is supportive of prices. “The trend in hog carcass weights will be an important factor to follow,” he adds.

Bright Spots

Will pigs saved per litter start to see large year over year increases again? “One-percent to 2% annual increases used to be the trend but the metric has failed to show much growth in recent years,” says Schulz. “There appears to be some improvement in managing porcine reproductive and respiratory syndrome and other diseases so there is potential to see productivity improvements going forward. Labor, however, remains a constraint.”

In late-December 2022, the June 2023 lean hog futures contract on the CME traded as high as $109.175/cwt. However, since that late-December peak, lean hog futures prices have dropped substantially. By the first full week in June, the June 2023 contract was trading around $85/cwt. Producers who took advantage of late-2022 and early-2023 pricing opportunities and hedged or established price floors are doing better right now. 
“Additionally, manure value is tremendous as commercial fertilizer prices have increased,” he says. “It’s in the $8 to $12 per head range after application so that helps.”

Future Expectations

Steve Meyer, an economist with Partners for Production Agriculture (see Part 1), and Schulz summarized their outlook with what the next three to five years might look like. They said a smaller sow herd is expected, given the current loss outlook, with no growth until there is a known increase in capacity. In addition, the industry could see a return of 1% to 1.5% per year growth in littler sizes, while aggregate litters per breeding animal may decline, in part due to regulations around Proposition 12. The economists anticipate slower growth in exports and softer domestic demand.

The labor supply for both producers and packers will be an issue in the future, along with the country’s ability to keep a foreign animal disease from entering the U.S. swine herd. 

Of concern to both economists is price discovery. “There are still a notable number of hogs that are being priced off of less than 2% of the pigs being sold,” says Meyer. “The system still needs to be fixed!”

Editor’s Note: Also see Part 1 for a review of comments from Steve Meyer, an economist with Partners for Production Agriculture at the 2023 World Pork Expo.