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Larger hog production coming and lower priced feed will likely result in supply pressure on hog prices next year

John Otte, Economics Editor

June 28, 2013

5 Min Read

Friday's USDA Hogs and Pigs Report is a bit bearish on hog prices for late 2013 and into 2014. That's because the breeding herd came in larger than traders generally expected. Traders might construe the report as a bit friendly to the front months. That's because the market hog inventory came in a bit smaller than traders expected. Put those two together and one could conclude some gilts that had been intended for the packing plant ended up in the breeding herd.

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USDA surveyed producers for the report on or about June 1. Prices surged in June. Through mid-week, the pork cutout was up 17% for the month of June, even though it slipped a bit toward week's end. Traders will now be attempting to assess whether June's dramatic hog price surge enticed producers to divert even more gilts that had been aimed at the packing plant to the breeding herd.

Crop reports generate more expansion incentive. Friday's USDA crop reports are generally bearish on new-crop corn and soybeans. That should reverse some of the extended hog losses due to high feed costs that have persisted since last summer. Lower feed costs point to better livestock margins. Expectations of better margins give pork producers more incentive to up production. More production typically pressures prices.

Expectations of lower feed costs are friendly to feeder cattle. Lower feed costs leave cattle feeders with more of the fed steer's value that they can pay for feeders. Just like with hogs, lower feed costs are generally bearish on fed cattle because producers will eventually up production. That will take a long time in terms of the beef cow herd. Pork producers need not fear a surge in competing beef supplies before deep in 2015.

Hog Breeding Herd Tops Trade Expectations, Market Hogs Fall Short

Broilers are a different matter. Poultry producers also see lower feed costs coming. Their short turn around cycle means broilers can ramp up production rapidly.

Looking at the numbers. Despite expansion occurring a bit more rapidly than traders generally expected swine producers have generally held the line on herd growth. USDA estimated:

* June 1 all hog and pig inventory at 66.647 million head, or 99.98% of a year ago vs. the average trade guess of 100.6%.

* June 1 breeding herd inventory 5.882 million head, or 100.3% of a year ago vs. the average trade guess of 99.9% of a year ago.

* Market hog inventory 60.765 million head, or 99.94% of a year ago vs. the average trade guess of 100.7% of a year ago.

* March-May farrowings at 2.931 million head, or 97.95% of a year ago vs. the average trade guess of 99.1% of a year earlier.

* June-August farrowing intentions at 2.925 million head, or 99.9% of a year ago vs. the average trade guess of 99.9% of last year.

September-November farrowing plans at 2.917 million head, or 101.0% of a year ago vs. the average trade guess of 100.5% of last year.

The far out farrowing intentions appear to be rising a bit more than the trade expected. Add a 1% rise in pigs per litter, a bit heavier hog weights and 2014's second half pork supply could be approaching up 2%.

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Late 2013 farrowings could end up a bit higher still. Bear in mind most of the recent cash hog price surge occurred in June after USDA collected the data for Friday's report.

PEDV is a sizable market wild card. In May porcine epidemic diarrhea virus, a foreign animal disease, turned up in U.S. swine herds. It mainly affects very young pigs with high mortality rates reported in many cases, could be a wild card for supplies later in the year. More than 200 positive cases surfaced in the U.S. in May and June.

PEDV is not a reportable disease as it does not affect international meat trade, so producers are not required to report cases or the number of animals that die from it to government officials.

PEDV is widespread in many countries of Europe and Asia. It doesn't affect people, and isn't a food-safety concern, according to the American Association of Swine Veterinarians.

PEDV appears to have had little market impact so far. But that could yet change.

March-May farrowings resulted in a record-high pigs weaned per litter of 10.31. Producers are clearly getting better.  But it remains to be seen if PEDV has any impact on pigs saved.

Last week Mexico announced it is prohibiting imports of live pigs from the U.S. due to PEDV. No trade disruption is good news. Fortunately, Mexico's move likely will not cause a major disruption here.

The ban involves live animals, not muscle cuts or pork variety meats, since the disease is not transferred through meat and poses no human health risk.

Last year's live hog exports to Mexico ran about 27,000 head. That's down from more than 120,000 per year in 2002 through 2007. Those 27,000 animals are a mere fraction of a typical 400,000 daily U.S. hog slaughter.

Still, the U.S. industry dodged a bullet. Other foreign animal diseases, foot and mouth and hog cholera to name just two, exist. Outbreaks of such diseases could turn off exports overnight.

Everyone in the U.S. industry must maintain diligence to keep such diseases out.

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