December 2002
Will Santa help hog producers with a bullish market this winter? Just
like the "good" girls and boys who are hopeful of a loaded
Christmas stocking, the odds suggests that hog prices are headed upward.
The hog market has put in a rugged year so far through November. Pork
production has been up 2.6% on 2.2% higher slaughter numbers. Prices
through November have averaged $35 compared to nearly $46 for 2001,
and costs have escalated by about $3 per live hundredweight higher since
the summer's drought.
But bullish indicators now greatly outnumber bearish arguments. The
first friendly indicator is an expectation for lower pork supplies in
December and continuing to drop through the winter. USDA inventory numbers
indicate a 1% smaller December slaughter, followed by a drop of 2% to
3% through the winter. Secondly, with higher corn prices this fall and
the depressed hog prices, marketing weights have come down. October
and November weights were down about 2 pounds per carcass, or around
1%. Weights will likely continue to be moderate in the coming year.
The bullish arguments continue. Sow slaughter remains high as producers
began liquidating breeding herds at the height of last summer's drought
and resulting elevated feed prices. The rate of sow slaughter began
to rise in April and reached its peak in July when it stood at 20% greater
than the same month in the previous year. But even in since last summer,
the rate of sow slaughter has averaged 12% higher. This means that the
breeding herd will continue to shrink into 2003. Another factor is that
excess pork in cold storage will likely continue to be reduced. In August,
cold storage stocks were 39% greater than the previous year. Today they
are down to 14% greater.
The bullish arguments can be extended to include an improving U.S.
and world economy and a bullish cattle market that will ultimately result
in some consumer substitution of increased pork consumption relative
to beef. In the Monthly Hogs and Pigs report, the number of number of
sow and gilts bred dropped under year earlier levels beginning in June
of 2002. This means that these smaller farrowings will start to show
up as smaller slaughter in the month of December, just in time for the
Christmas season. Canadian imports, which were up sharply in the first-half
of 2002 have moderated some in the past two months, dropping by 8% compared
to the same period in 2001.
And finally, traders in the lean hog futures market are optimistic
that prices are ready to recover. On November 29th February futures
suggests live hog prices near $40 for February, $44 by May, and $48
by June.
My own price estimates for 51% to 52% lean carcasses on a live weight
basis are similar. I expect the mid-$30's by the end of the year, then
improving to the upper $30s for a first quarter average, the low $40s
for a second quarter average, and the low-to-mid $40s for the summer
quarter.
If you doubt that prices can recover as much as suggested, keep in
mind that hog prices have been surprisingly responsive to small supply
changes in the past several years. As an example, in 2002, pork supplies
will finish the year about 2.5% higher, yet prices will be down about
23%. For 2003 pork supplies will move downward and a sharp price response
to the upside can be expected. In addition, it is likely that the breeding
herd will continue to move lower through at least the first-half of
2003, with strong prices continuing into late 2003 and early 2004.
It's been another year of endurance for pork producers, but considerable
improvement should soon be on the way.
Chris
Hurt
January 2, 2002
Purdue University
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