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Hog and Pig Population Undercounted, Analyst Says

Market losses seen into 2018

Lean hog futures pushed to limit down today and closed just off of it.

This was in reaction to the limit down cattle trading and partly due to supply fears from the 2 p.m. Hogs and Pigs report.

Before we go through the HP numbers, let’s point out that USDA went back through the previous quarterly reports and added to (corrected) them to reflect the actual slaughter that happened after. The December 1, 2015, number saw a boost of 50,000 head. The March 1 number was increased by 650,000 head. An extra 40,000 was added to the June 1 number.

We are concerned that today’s report may have undercounted the herd, yet again. That is the general pattern when this industry is in expansion.

The total hog herd as of September 1 was estimated at 2.4% over last year. That surpassed the 1.2% trade estimate. Of those numbers, 64.835 million was classified as Kept for Marketings. These are the hogs that will not be held back for the breeding herd.

They make up the hogs that will be killed at packing plants for the next six months, from September 1 through February 28. USDA’s number was 2.6% over last year. That surpassed the 1.3% trade guess.

Of these numbers, USDA also gives us a breakdown by weight so we can estimate when they will hit the market. The heavyweight group, 180 pouds or over, ran 4.1% over last year. These are the hogs that will be slaughtered from September 1 through mid-October.

That is interesting, as the month-to-date kill is running 5.3% over last year. That includes the past two weeks at +8.0% and +7.4% year/year. To make USDA’s numbers work, you will need a quick decline in slaughters up ahead.

Mid-October through November kills are determined by the next weight group, 120 to 179 pounds. They were seen 3.7% over last year. This is the group that will determine the year’s seasonal peak in supplies. In other words, the peak kill of the year may run 4% over year’s record level. The other two weight groups that determine the December through February kills were 2% over last year.

The breeding herd was estimated at 0.5% over last year. That was right on the average analyst guess. For future farrowings, births, producers told USDA they expect no change in Sep/Nov vs. 2015 and -0.1% for Dec/Feb. When you factor in the 1.8% year/year gain in pigs per litter you are set for good year-over-year gains in production through August 2017 at a minimum.

The massive decline in hog prices since summer is not just due to higher prices.

There is an unnaturally large discount in prices, as end users are doing all they can to discourage producers. This is seen in the farmer share of the retail dollar discussion this week in the cattle comments. From their perspective they don't want these numbers, and the market has to find a price that they will accept.

Due to the production time in the hog industry, it would take almost a year before supplies see their first year-over-year decline, if producers magically stopped inseminating the next round of open sows and gilts.

A little more concerning for us is that after this big hog price decline since summer, we are just not getting into production losses. Producer breakevens are at $61. It usually takes three months of straight losses before producers decide to liquidate. With an almost four-month gestation and a six-month birth-to-slaughter lag, we are set for lower and lower prices into fall 2018.

If you wanted to be even more bearish, you could point out that we still have set expansion from the producer/packers building new plants. They would be willing to produce at a $2 to $8 loss on the hog production end if need be to ensure the numbers are in the plants.

Keep The Hedges On: Producers who followed Allendale’s recommendation on June 22 should have all hogs to be marketed through the month of February locked in via the December contract. Those hedges should have been applied at 65.42, the open of the 23rd. We still advise to hold all hedges.

From a producer standpoint, low prices are a bad thing (good for buyers). From a market pricing theory standpoint, low prices do an important service for the industry. Think of how we produce meat across the world. We blindly produce a product for an unknown demand almost a year out. Either we heed the market’s clear warning or the market will continue to punish until it happens.

For speculative trading, we will stand aside. It’s not the money that you are not making that is the issue (lost opportunity), it is the money you could lose in this market if you are wrong.


Rich Nelson
Allendale Inc.
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