Logic suggests that rising supplies pressure prices lower, all else equal. First-quarter 2017 pork supplies ran 3% higher than a year earlier. Yet nationally, first-quarter 2017 barrow and gilt carcass prices averaged $68.15 per cwt, up 8% compared to $63.13 per cwt for the same period in 2016. Higher prices in the face of rising supplies clearly indicate strong demand.
Strong domestic and international pork demand continues to support expansion. The challenge will be sustaining prices with the record large production again this year that USDA confirmed in its March Hogs and Pigs Report. For now, the market anticipates supply will align with pork demand such that prices will cover full cost of production.
The surprise in USDA’s March quarterly report was the lack of surprises. All of the numbers were within the range of the pre-release estimates by analysts, except producer-reported June-August farrowing intentions. Analysts expected a slightly larger number for this first intentions estimate. However, second intentions have been higher than first intentions for several reports in a row. Second intentions are better forecasts of actual sows farrowing. This will be a key number to watch in the next report to see if producers may have become more optimistic about profit prospects and plan to increase sows farrowing.
Record number of hogs
The inventory of all hogs and pigs as of March 1 totaled a record for the quarter at 70.98 million head, up 4.2% from a year ago. Slaughter numbers have run higher than expected in 2017, and USDA revised upward the size of the June-August 2016 pig crop by 1.2% to account for the heavier runs.
Just like the all hogs and pigs inventory, the number of market hogs as of March 1 was record large for the quarter at 64.91 million head — up 4.4% year-over-year. These are the market hogs arriving at processing plants from March to September this year.
A similar story unfolded for the breeding herd, which was up 1.5%, and the largest March 1 breeding inventory since 2008. Recognize that a 1.5% breeding herd rise results in an even greater expansion of pork production due to more pigs per litter, which have been record high in each of the last 10 quarters. Heavier market weights can also boost production, if the market provides incentives.
Some unevenness exists in the change in breeding herd numbers over the past year. One constant is the Midwest states have collectively been the most aggressive in adding breeding inventory. For the 16 states that USDA estimates in the March report, the breeding herd was up 16% in Missouri, 8% in Illinois and Indiana, 5% in South Dakota and 2% in Iowa compared to one year ago.
Iowa market herd surges
While the Iowa breeding herd growth was moderate, the market hog inventory was 8.2% higher than on March 1, 2016. The inventory of pigs under 50 pounds was 15.5% higher than one year ago. According to the National Direct Delivered Feeder Pig Report, Iowa continues to be the primary destination for feeder pigs. Consistently, 50% to 70% of feeder pigs crossing state lines end up in Iowa. That number has been above 70% at times, as of late. Other individual states receive less than 10% of the weekly volume.
Analysts use the latest inventory numbers to forecast slaughter levels for the rest of 2017 and the first quarter of 2018. Market hog inventories indicate second-quarter 2017 hog slaughter will be up 4.7%, with the third quarter up 3.7%. Fourth-quarter slaughter is projected up 3.8%, reflecting larger spring farrowings and more pigs per litter. Calendar-year 2017 hog slaughter is forecast to be up almost 4%. Slaughter in the first quarter of 2018 will come from "at par" intended summer farrowings. With more pigs per litter expected, first-quarter 2018 slaughter could be 1% to 1.5% larger.
Pork production is expected to have a similar year-over-year change as dressed weights are essentially projected to be unchanged compared to 2016 levels. Any incentive to feed hogs to heavier weights will likely be offset by stout packer demand for hogs keeping marketings current.
Market has firm underpinning
This additional production doesn’t mean hog prices will plummet. To the contrary, lean hog futures prices have made impressive gains since hitting contract lows on Oct. 5, 2016. February 2017 futures matured up more than $27 per cwt from the low and $9 per cwt higher than February 2016’s final settlement. At the time of the March Hogs and Pigs report, April, May, June and July contracts were lower than final 2016 settlements for these contract months. However, August, October and December contracts were higher, especially August and October.
At this time of year, producers are reminded of the threat of higher feed prices if weather should turn harmful to growing crops. With current feed price prospects at some of the lowest levels in years, consider some coverage on new-crop feed supplies. The growing hog and pig inventory boosts feed demand.
How USDA gathers data
To obtain an accurate estimate of the U.S. swine industry, USDA’s National Agricultural Statistics Service surveyed over 7,500 operators across the nation during the first half of March. About 5,400 operations, or 72% of the total sample, responded. USDA collected data by mail, telephone and through face-to-face interviews. All surveyed producers were asked to report their hog and pig inventories as of March 1, 2017.
Market participants use this current and expected future supply information to anticipate price changes and position their business operations accordingly. For example, an increase in market hog inventory would indicate future increases in hog slaughter and pork supplies. This would cause prices to decrease, everything else held constant. Producers might react to this information by reducing farrowing intentions or using some type of risk management tool to hedge against declining prices. Packers and processors would make plans to increase capacity through additional operating hours, etc. Market analysts can use the information in the report related to breeding herd inventory and average litter size to make long-term price forecasts based on expected expansions and contractions in pork production.
Schulz is the Iowa State University Extension livestock economist. Contact him at [email protected].