Hog slaughter continues to outpace estimates and, based on the latest ‘Hogs and Pigs’ survey results, slaughter should remain higher y/y through the spring and summer.
Highlights
- Hog slaughter continues to outpace estimates and, based on the latest ‘Hogs and Pigs’ survey results, slaughter should remain higher y/y through the spring and summer.
- Producers have responded to deteriorated margins by reducing the size of the breeding herd. In the near term, however, the herd reduction has been more than offset by productivity gains.
- The smaller breeding herd and productivity gains returning to trend later in the year set the stage for potentially lower supplies late in 2024 and in 2025.
- Demand remains the focus for the market in 2024. Speculation about the impact of Prop 12 impact persists although so far fresh pork demand has performed far better than expected.
- Export demand continues to perform especially well but increasing competition from Brazil, and lower pork prices in China, could present headwinds for US pork exports in the new year.
Full Report
Before we cover the implications of the latest USDA ‘Hogs and Pigs’ report, it is worth noting that USDA went back and made some significant revisions to estimates for the previous two years. The September 1 inventory was revised up by 1 million hogs and the June 1 inventory was revised up 806k head. USDA usually does not make adjustments to the breeding herd estimate, but the December 1 2022 breeding herd was revised up by almost 100k head. The breeding herd was also revised up all the way to March 2022. This puts a bit of context on the sharp drop in the chart below.
It’s not that the December 1 herd declined sharply, it’s that the herd from the previous quarters was revised higher.
Market Hogs and Supply Implications for the Next Six Months
The analyst estimates for hog supplies in the near term were demonstrably wrong based on the pace of slaughter during December. USDA pegged the supply of hogs over 180 pounds up 2.4% vs. a year ago, recognizing the supply coming to market this far. This is 1.5% higher than what analysts were projecting. The inventory of hogs between 120-179 pounds, which should come to market between mid-Jan and mid-Feb, was 0.7% higher than a year ago. Analysts were thinking this supply would be near last year. The pig crop for Jun-Aug, which should correspond to Dec-Feb was estimated 0.8% higher than last year. With the hogs coming to market up to this point, does this mean that we may see fewer hogs in late January and February? More likely in our view is that the pig crop for Jun-Aug will be revised higher.
USDA was also a bit higher than estimates in the inventory of hogs between 50-119 pounds and under 50 pounds, basically hogs that should come to market through the spring. The inventory was 0.5% lower than last year and consistent with the pig crop for Sep-Nov. At this point, the supply of market hogs for the spring is generally consistent with the Sep-Nov pig crop, estimated 0.2% lower than a year ago. However, the ratio of farrowings during Sep-Nov vs. the Sep 1 breeding herd calculates to 48.8%, one of the lowest in the past decade. USDA had something similar last year and then it was revised higher. Should the farrowing rate be closer to what it normally is for this time of year plus the 3.9% increase in pigs per litter, then we could presumably get the pig crop for Sep-Nov to be up 0.5% to 1% vs. a year ago. This is part of the reason why we view the report as moderately bearish for the winter and spring months. We have revised our supply/demand table accordingly. The number of pigs saved per litter may appear big when compared to year ago, but it’s important to remember that productivity was well below trend in 2020-22. Productivity levels are now back to the pre-COVID trend, offsetting the reduction in the breeding herd and farrrowings (see charts below).
Breeding Herd and Outlook for Summer/Fall
USDA made a big revision to the breeding herd for December 2022, reflecting the updates made to the farrowings in previous quarters. Prior to the report, analysts were thinking the breeding herd on December 1 would be 1.3% lower than a year ago. This implied a breeding herd of around 6.026 million head. The USDA breeding herd estimate was 5.999 million head, lower than expected. Because the breeding herd for December 1, 2022 was increased, the y/y change is now 205k head (-3.3%) and 2 full points lower than analysts. We have some reservations with regard to the revisions made by USDA and the breeding herd for December 1. According to USDA, the breeding herd September 1 was 6.179 million head. The estimate for December 1 was 5.999 million head, about 180k head (-2.9%) decline from the previous quarter. If true, this would be the biggest such decline since 1999. Assuming this estimate is correct, it implies the lowest replacement ratio in more than a decade, and a 12% decline in gilt retention vs. the same quarter last year.
The decline in the breeding herd should result in lower farrowings during winter and spring. The survey put farrowing intentions for Dec-Feb at 2.900 million, 1.8% lower than a year ago. The ratio of these farrowings to the Dec 1 breeding herd calculates at 48.3%, higher than the previous three years and back to pre-COVID levels. The main reason why we see the report as friendly for the summer and fall is the sharp decline in the breeding herd. However, the decline in farrowings needs to be balanced against the potential for the pig crop this winter. If pigs/litter has indeed returned to pre-COVID levels, then we could presume pigs per litter during Dec-Feb at 11.45, 3.9% higher than the previous year. This would more than offset the expected decline in farrowings, resulting in a pig crop during Dec-Feb, 2.1% higher than the previous year.
There are two unknowns here: a) farrowings may be down more than intended based on the lower breeding herd; b) pigs per litter may not be up as much depending on disease pressures this winter. Farrowings intentions for Mar-May were down 1.2% from the previous year. Again, using the pre-COVID trend, we could see pigs saved per litter for Mar-May in the 11.5 – 11.55 area, thus up 1.2% to 2% y/y. This would imply a pig crop that could range from slightly under to as much as 0.7% higher than a year ago. We have raised our forecast for pork production in 2024 based on the latest numbers. It is also important to remember that there are extra marketing days in Q3 and Q4, which add to the overall estimate. Our forecast is for slaughter in 2024 to be up 1.7% vs. 2023, almost all of this due to more pigs saved per litter. Pork production is expected to be up 2% on modest growth in hog carcass weights.
Price Chart
Forecasts
Steiner Consulting Group produces the National Pork Board newsletter based on information we believe is accurate and reliable. However neither NPB nor Steiner and Company warrants or guarantees the accuracy of or accepts any liability for the data, opinions or recommendations expressed.
