September 2002
The panic selling of sows and light weight market hogs in July and
August appears to have it’s silver lining as the breeding herd
has shifted into liquidation, and market hog numbers will begin to decline
later this fall. As a result, the great fears of insufficient slaughter
capacity and horribly depressed prices this fall has eased. Hog producers
will still have losses to face in coming months, but they will not be
nearly as large as was feared.
The source of the better news was USDA’s September Quarterly
Hogs and Pigs report. The breeding herd was reported to be down 1.7
percent as of September 1, compared to a slightly higher inventory in
June. The decline can be attributable to rapid liquidation of sows in
July (up 20%), August (up 17%), and September (up 12%). During these
three months a total of 120,000 more sows were slaughtered as compared
to the same period last year. Looking back to the spring, sow slaughter
in the months of April, May, and June was also five percent higher than
the same period last year representing an additional 40,000 sows.
Fewer sows meant that farrowings this past summer were much lower than
anticipated. In the previous June quarterly update, producers indicated
they would farrow two percent more sows in the June-August period, but
actually reduced farrowings by 1.5 percent. As a result of the smaller
summer farrowings, the quantity of market hogs was also much smaller
than anticipated. Pigs that weighed 120 to 179 pounds representing the
bulk of October slaughter were up three percent. But slaughter of market
animals should begin to drop below year earlier levels in November as
the 60 to 119 pound inventory was down modestly. Pigs that will come
to market in roughly December to February were down one percent.
Producers are indicating they intend to continue to reduce sow farrowings
and thus market hog supplies into 2003. Fall farrowing intentions were
down 2.5 percent and winter farrowing intentions were down one percent.
Marketing weights have also come down sharply and are also expected
to help moderate pork supplies during the next 12 months. The reason
is high feed prices and low hog prices. The transition to lower weights
occurred in August. At the start of the month, slaughter weights were
nearly one percent above the previous year, but dropped to below by
the end of the month. Weights have moderated further in September dropping
as much as two percent below last year, likely because of advance marketings
of market hogs. For the fall, I expect weights will remain slightly
under last year, but can be expected to increase with higher hog prices
into the winter. For the next 12 months, I anticipate weights to be
up about only .4 percent.
The hog price tone should improve immediately with prospects for less
pork than had been anticipated. Still, pork production in the fourth
quarter of 2002 and first quarter of 2003 will likely be nearly unchanged
from the same quarter in the previous year. However, by the spring and
summer, supplies are expected to begin to drop by about two to three
percent. For all of 2003, pork production should be down about two percent.
Fall prices for 51% to 52% lean hogs is now expected to average in
the $30 to $34 range. This is a substantial improvement over mid-to-higher-$20
discuss before the report. Prices should improve further in the winter
to the higher $30s, and keep marching higher into the spring when they
are expected to average in the low $40s. Summer 2003 prices may reach
the low-to-mid $40.
Because of the rapid liquidation, financial losses are not expected
to be nearly as bad as feared prior to the report. Total costs are currently
estimated in the $39 to $41 range and have declined somewhat with moderation
in corn and meal prices since the September 12th USDA grain updates.
Estimated losses in the third quarter just completed are estimated at
about $20 per head, and are expected to be somewhat worse for the last
quarter this year at $22 per head. However, by the winter, those losses
should be sharply reduced at about $5 per head, with a potential return
to breakeven by the spring, and some profits by summer. Lower feed prices
by the fall of 2003 could drop costs back into the higher $30s.
Producers are breathing a sigh of relief. Losses are still going to
accumulate this fall and early winter, but they are not going to be
nearly as severe as had been anticipated. A return to break evens can
be anticipated by early spring, with some positive returns by late spring
and summer. If additional sow liquidation continues this fall and winter,
hog prices should be strong in the last-half of 2003 and into 2004.
For now, producers should calculate their variable or “out-of-pocket
costs” and continue to produce hogs this fall as long as they
anticipate they can recover these variable costs. In general, most will
continue to keep animals in inventory but they should trim their least
productive animals, keep market weights moderate, and continue to evaluate
their longer-term strategies in this changing industry.
Chris
Hurt
September 30, 2002
Purdue University
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