What's causing low hog supplies?According to Chris Hurt, low slaughter numbers have been the primary driver of higher lean hog futures and seasonally strong cash prices.
By: Debra Levey Larson, Agweek
URBANA, Ill. — The U.S. Department of Agriculture’s September hogs and pigs report found that hog inventories were unchanged to somewhat larger. Yet slaughter in recent weeks has been very low, seemingly indicating a divergence from the USDA reading. According to Purdue University Extension economist Chris Hurt, low slaughter numbers have been the primary driver of higher lean hog futures and seasonally strong cash prices.
“One common explanation for the recent low slaughter numbers is that death losses from the porcine epidemic diarrhea virus (PED) has reduced the market herd much more than had previously been thought,” Hurt says. “If that is true, hog prices could strengthen further with limited supplies this fall and winter.”
But, Hurt says there are other explanations that need to be considered, such as how big is the reduction in recent slaughter supply.
“Since the middle of August, weekly slaughter rates have been down from 3 to 10 percent,” Hurt says. “For the last seven weeks, spanning mid-August through the end of September, slaughter has been down in aggregate by over 5 percent. Given the low slaughter numbers, cash prices of hogs have been sharply higher than in the same period in 2012 when they averaged $55 per live hundredweight. With sharply lower slaughter this year, they have averaged about $68 since mid-August. Lean hog futures have also increased about $4 to $5 over the same period.”
Hurt says the impact on hog numbers from the PED virus remains a mystery.
“There is no accurate national accounting of death losses from the disease,” Hurt says. “Pork producers and packers have suggested a 1 to 2 percent reduction in slaughter supplies this fall and winter. In addition, it had been felt that the lower slaughter numbers would not start to show up until the fall,” he says.
So what other explanation is there for the low slaughter numbers in the past seven weeks?
“One involves the very nature of the way the industry evaluates numbers, and that is by comparing this year’s slaughter to the slaughter for the same period one year ago,” Hurt explains. “When numbers viewed in this manner appear unusual, it can be because of aberrations this year, but it can also be due to aberrations in the numbers a year ago. What is being viewed as a very low slaughter level this year may be due to an aberration in the slaughter numbers a year ago. The unusually high slaughter in the late summer of 2012 was being driven by the drought and the impact on hog slaughter numbers,” he says.
The 2012 drought rapidly pushed corn and meal prices to peaks in August and September of 2012. Record-high feed prices and large anticipated losses provided a grave outlook for the industry and some began to adjust. Sow slaughter rose as some producers tried to quickly reduce their herd size and others decided to exit the industry. Second, producers began to advance shipments of market hogs to reduce losses on every pound being produced. Marketing weights prior to the drought had been running nearly 2 percent higher. Those began dropping in August, eventually reaching about 2 percent lower by the fall of 2012. As a result, slaughter was up more than 5 percent from mid-August through September of 2012.
This year, Hurt says, the outlook is almost the opposite.
“Feed prices (especially corn) have been falling sharply,” Hurt says. “The hog outlook is profitable, and producers are more likely to be retaining or building the breeding herd and weights are expected to increase as producers hold onto market hogs longer to gain profits on every pound. To the extent that recent low slaughter numbers are explained by the unusual economic conditions in the late summer of 2012 compared to this year, USDA’s recent inventory numbers may not be so far off.
“Those show that the breeding herd is only fractionally larger than a year ago,” Hurt continues. “This would be consistent with an industry which has not yet had time to expand the herd. Expansion of 1 to 2 percent can be expected to be revealed in the December and March 2014 inventory counts. USDA’s inventory count did show that market hogs of 180 pounds or higher were down 4 percent. This is reasonably consistent with the 5 percent lower slaughter supplies that have recently been experienced. In addition, preliminary data suggest that sow slaughter during the most recent seven weeks is down over 20 percent from the same period in 2012 when drought panic greatly influenced behavior.”
Hurt says the higher-than-expected USDA numbers cannot be dismissed as unrealistic.
Editor’s note: Larson is a news and public affairs specialist for the College of Agricultural, Consumer and Environmental Sciences at the University of Illinois in Urbana.