No Hog Supply Growth Expected in 2022
March 28, 2022
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- Hog inventory survey is expected to show total inventories 1% below year ago and no growth in the breeding herd.
- Hog futures hit contract highs last week on speculation that hog supplies will remain limited, export demand will continue to improve and high feed costs will constrain future growth.
- Pork prices at wholesale have been steady to modestly higher. Lower prices for pork loins, which is normal for this time of year, have been offset by higher prices for bellies and pork butts.
- Fat pork trim remains in very tight supply due to lower slaughter and high prices for beef and chicken trim. Expectations are for pork trim in general to be higher in the spring and summer as supplies seasonally decline.
- Picnics are one of the few items that are trading lower, largely a function of lower exports to Asia. Ham values, on the other hand, remain volatile and highly dependent on the level of bone-in sales to Mexico.
USDA ‘Hogs And Pigs’ Inventory Report Expected to Show No Supply Growth, Tight Supplies this Spring
USDA will release on Wednesday, March 30 (3 p.m. ET), the results of its quarterly survey of hog operations. The report offers the latest estimates of the supply of pigs on the ground as well as the potential for supply growth in the next 9-12 months. Hog breeding inventory: There is a fair amount of uncertainty regarding the hog breeding herd on March 1 and thus the potential for supply growth later in the year and in 2023.
Despite robust hog prices, high feed costs, disease, domestic non-tariff barriers (Prop 12 in CA) and uncertain demand have market participants guessing as to what to expect. From the last USDA survey, we know that the supply of hog breeding stock on December 1 was 6.180 million head. Usually, that number does not see any significant revisions. To this supply, one needs to add the number of Canadian sows and boars that were imported for slaughter or breeding. Based on weekly data, the supply during the 13 weeks of Dec-Feb was 138,700 heads, 1.6% less than the previous year.
The two numbers above are only part of the breeding hog supply that’s available for the quarter. Producers also retain female pigs (gilts) to replace the sows that are no longer productive and need to be culled. That gilt retention rate is unknown. Different from cattle, for instance, USDA does not collect any statistics on gilt slaughter. The best we can do is try to guesstimate based on the quarterly results. Did producers retain more gilts than the number of sows they slaughtered during the quarter? That has not been the case for the last 9 quarters, at least based on our calculations. While that is possible, one needs to consider some of the factors mentioned above.
Proposition 12 has made things more difficult. One way to comply is to reduce the breeding stock in a barn rather than invest in new facilities. Based on guesstimates, since 2015, the implied ratio of gilts retained to sow slaughter has been around 93% for the Dec-Feb quarter. Last year it was around 98%. If we assume the same this year, it would imply gilt retention under a year ago (lower sow slaughter implies fewer gilts retained).
The February sow slaughter estimate was at 239,300 head, 0.8% lower than the previous year. For the entire quarter, sow and boar slaughter was 821,400 heads, 51,100 heads. That is 5.8% lower than the same quarter in 2021. If all the above numbers are correct, and also adjusting for some herd losses due to disease, etc. We could see the breeding herd on March 1 at 6.2 million head. That is not much different from December or a year ago.
Producers Have Stopped Liquidating, as Shown by the Ratio of Sow Slaughter vs. Breeding Stock.
During the Dec-Feb quarter, the ratio is was 13.3%, the same level as before the COVID outbreak. Starting to grow, however, would require a more stable market environment. This is especially with regard to feed costs and domestic and export demand. Getting more pigs per litter, even when the breeding herd was stable, used to be a reliable growth factor. But in the last two years, the number of pigs saved per litter has been flat. Disease pressures have clearly impacted productivity and will further add to supply uncertainty going forward.
Pig Crop and Hog Supplies
In the December inventory report, USDA pegged the Sep-Nov pig crop 4.8% below the previous year. Normally these would be pigs that come to market during Mar-May. So far, the USDA estimate appears to be quite accurate as hog slaughter in the first four weeks of March has been running 5% under year-ago levels. The range of analyst estimates for hogs over 180 pounds is between 95.6% and 102.3% of last year. We have already seen most of these hogs come to market so the high end of the range simply makes no sense. More likely we will see numbers around 95.5-96.0%.
In December, producers noted that they expected farrowings to be 0.5% higher than the previous year. Assuming a 0.5% increase in pigs per litter, this would imply a Dec-Feb pig crop about 1% higher than the previous year. This is mostly why analysts polled think the Dec-Feb pig crop will be 1.3% higher than the previous year. Judging from the action in summer futures, market does not seem to believe this. Disease losses have likely impacted the pig crop during the quarter. It should be noted that the pig crop for the Dec-Feb 2021 period was 91.6% of the previous year. So we are comparing to a very low number. Still, we think futures may view as a survey result that puts the pig crop for Dec-Feb of this year above a year ago.
As for fall supplies, market participants will pay close attention both to the size of the breeding herd in March and the farrowing intentions. While the intentions number is usually a bit squishy, it still offers an indication that we can then review against the historical trends. Using analyst estimates for the breeding herd on March 1 and farrowing intentions during Mar-May, we calculate a farrowings/breeding stock ratio of 48.8%. This is a bit lower than the last few years but in line with the declining trend.
If disease issues persist, one could argue for the ratio to be modestly lower. Analysts think farrowings for the Mar-May period will be about 0.4% lower than the previous year. The reduction will be offset by higher pigs per litter (trend), implying fall supplies that are only marginally higher than they were a year ago. Futures currently hold a significant premium to last year. If the farrowing/breeding herd numbers come in higher than expected, we think fall futures might see a correction. However, high feed costs and broader inflation remain key factors driving speculative buying in that part of the futures curve.
Weekly Pork Price Summary
USDA prices for pork sub-primals, including butt, loin, ham, picnic, belly, trim, and spareribs.