Producer Losses Expected To Drive Liquidation, Reduce Supply In 2024

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Producer Profits Sink In The Red And Outlook Looks Dire For The Rest Of 2023. Not If But How Much

The IA State Extension model shows that producers lost about $31/head in March and an average of $34/head for all Q1. That is the biggest decline in producer profitability in a decade and the situation looks difficult for much of this year. Lean hog futures were down sharply at the end of the week on more long liquidation. There was some hope that May would see improved demand and higher wholesale prices. After all, futures earlier in the week were implying belly prices for June as high as $120/cwt (based on where the cutout was trading) and belly prices for August as high as $150/cwt. But little has changed in the belly market and items that should be doing well at this time of year, such as loins, have also struggled.

The latest USDA ‘Hogs and Pigs’ report suggested that producers are looking to reduce output. This is evident in the farrowing intentions figure for Jun-Aug that was 2.9% lower than the previous year. It would be hard to get farrowings to decline to that extent without some liquidation. News reports suggest that liquidation is in the works. A report last week in the National Hog Farmer noted that Smithfield Foods, the largest hog producer in the country, is expected to close 37 sow farms in Missouri starting May 1. There was no mention in the story as to how many sows will be removed from production. But given the large network of farms involved, the final figure may be in the tens of thousands.

Other producers may be looking to reduce their footprint as well but that has yet to show up in the slaughter figures. USDA reported sow slaughter in the four weeks ending April 22 to be 236,100 head, 2.9% lower than a year ago. At the same time, the price of live cull sows has collapsed. According to USDA, yesterday the price of 450-499 lb. sows was under $28/cwt, 59% lower than where it was in early March and 66% lower than the comparable week a year ago. Why have cull sow values tanked even as slaughter numbers are lower than a year ago? There is a clear mismatch between demand to get sows slaughtered vs. demand to get sow meat bought. Like pushing on a string, processors are finding that regular buyers already have too much inventory. Sow meat is not something that you can put on sale and sell in the meat case. The customers are processors that use it in sausage production and, just like with bellies, if the processor already is swimming in meat, it might take some seriously low prices to make product disappear. Competition for shackle space and weakness in retail and foodservice demand will make for a difficult couple of months for producers that have made the decision to liquidate. Just as important, however, is the decision to retain fewer gilts. That is always somewhat of a black box and we can only get an idea about gilt retention trends after the inventory data is released.

The inventory of breeding hogs on March 1 was estimated at 6.127 million head. That is about 0.5% higher than a year ago. Any liquidation and gilt retention decisions during Mar-May will be reflected in the Jun 1 herd and ultimately in the pig crop for the next quarter. The chart to the right shows the relationship of the Jun 1 hog breeding herd and the Jun-Aug pig crop. If the 2.9% farrowing estimate from the last inventory report is close to right, then it would imply a breeding herd at around 6 million head level as of June 1. That is the lowest since 2016. It would also imply a pig crop for that Jun-Aug quarter down about 800-900k head vs. the same time in 2022 and lower hog supplies next winter.

Bottom line: Contraction in the industry is coming. At the same time, we are seeing less pork production in Europe. One way or another, producers will look to bring a margin back in the business and get pork prices at a level that corresponds to their rising costs.

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