Hog producers limited in short-run to change production
Some businesses can adjust production based on input costs and expected sale prices. An ethanol plant, for example, can react relatively quickly to a significant decrease in the price of ethanol by reducing production, or idling completely. As ethanol prices increase, ethanol plants can respond by boosting output. Many business in the manufacturing sector are likewise able to respond to input and output prices. There is a cost to scaling production, but the business decision does exist for many firms.
Biology, however, prevents hog producers from instantly responding to price changes. The timeline for pork production - from farm to retail - is about 10 months. Gestation (pregnancy) is 3 months, 3 weeks, and 3 days. Farrowing (birth to weaning) is 3 weeks. The nursery stage is 6 to 8 weeks and growing and finishing is 16 to 17 weeks. This is even longer when considering the production of breeding stock. It takes about 32 weeks, from birth to breeding age, before a gilt (a female hog that has not farrowed – that is, given birth) is ready to reproduce.
This extended timeframe makes it difficult to change the direction of pork production quickly. Producers make decisions to expand or contract production before feed and hog prices are known. Biological lags mean that pork consumed today is based on production decisions made 10-18 months ago.
The Iowa/Minnesota barrow and gilt weighted average carcass base price for all purchase types averaged $67.58 per cwt in 2019, up from $64.37 in 2018. Composite formula and cash 10-12 pound early weaned pigs average $43.51 per head in 2019, up $3.59 or 9.0% from 2018. Similarly, 40 pound feeder pigs averaged $60.58 per head, up $6.14 or 11.3% from 2018. These prices provided above breakeven returns for many hog producers, especially during seasonally high price points.
In January 2020, lean hog futures suggested a higher annual price in 2020 than in 2019. Much of this optimism was predicated on global pork demand. Passage of the USMCA and the signing of trade deals with Japan and China (Phase I), provided positive fodder on trade. The protein deficit caused by the African swine fever outbreak in China and other parts of Southeast Asia continues to create opportunity for exporting countries to fill the void and provide opportunities for back-filling other partner country demand needs. Kansas State University, calculated the US retail pork demand index for January 2020 at 97, which was the 11th highest monthly level in the past 10 years. Early 2020 domestic pork demand was strong.
Then the coronavirus (COVID-19) pandemic exploded. The shock wave surged through China, Asia, Europe and into the US. Lean hog futures plummeted. The pork industry plus US and global economies, plunged into uncharted waters. One huge longer-term question is the overall impact on domestic and international pork demand. Another is how loss of income in places hardest hit by COVID-19 will curtail demand.
Short-run actions to manage the epidemiology of COVID-19 could significantly impact pork supply chains. Care for animals is essential. Work by farmers and veterinarians needs to continue. Meatpackers, feed delivery, and other service providers play critical roles. How business is conducted has changed. Costs are higher. Ample unknowns persist about the timing, severity, and aftermath of COVID-19 and the short-, medium-, and long-term impacts on the pork industry.
What is certain is that due to the biologically determined timeline of pork production, extreme fluctuations in hog prices make it ever more difficult for producers to gauge which way the market price will be heading when their hogs are ready to be sold. And, for the near-term, it is important to remember that a lot of hogs and pigs are on the ground and that supply cannot simply be turned off. Hogs are not a storable commodity like grains.
On March 26, USDA’s National Agricultural Statistics Service released its Quarterly Hogs and Pigs report based on producer surveys (Table 1). The report continues the storyline of record production. Every March report since 2015 has set new quarterly records for the all hogs and pigs inventory and market hog inventory. Pork production in 2020 is projected to total 28.985 billion pounds, up 4.9% year over year according to the March USDA World Agricultural Supply and Demand Estimates.
Through the first two months of 2020 federally inspected hog slaughter totaled 22.43 million head, up 6.6% from January and February 2019, according to USDA’s monthly Livestock Slaughter report. March hog slaughter was estimated up 11.1% compared to a year ago, based on the daily data.
The robustly higher slaughter may indicate that producers are pulling some hogs forward out of fear of even lower cash prices. If so, slaughter weights should be lower. Average carcass weight of producer- sold barrows and gilts for the week ending April 3 dropped to its lowest value of the year at 213 pounds, almost a pound below the same week in 2019. That dip does not indicate hogs are being pulled forward.
Year-to-date actual slaughter numbers do not align with projections made from inventory estimates in USDA’s December 2019 Hogs and Pigs report. USDA routinely revises previous inventory estimates when hard data, in this case slaughter numbers, become available. In March, USDA raised the estimate of the December 1, 2019 all hogs and pigs inventory by 1.32 million head or 1.7%. The breeding herd was raised 10,000 head or 0.2% while the market hog inventory was raised 1.31 million head or 1.8%. USDA revised the number of sows farrowed during June-August 2019 up by 95,000 litters (3.0%) and boosted the June-August pig crop by 1.055 million pigs (3.0%). They upped the number of sows farrowed during September-November 2019 by 81,000 litters (2.6%) and hiked the September- November pig crop by 906,000 pigs (2.6%).
For these pig crop revisions, USDA did not revise their original estimates of pigs per litter or breeding herd inventory, as is their standard operating procedure. They have statistical modeling reasons for this. If the size of the pig crop is revised and pigs per litter do not change, then the revised sows farrowed becomes the revised pig crop divided by the initial pigs per litter. Thus, USDA adjusts the pig crop to align with hog slaughter roughly six months later, and then sets sows farrowed equal to the revised pig crop divided by the original estimate of pigs per litter. This makes forecasting changes in sows farrowed easier. But, it doesn’t make forecasting hog slaughter easier or more accurate. Being able to correctly anticipate slaughter numbers is very important to price forecasting.
The US inventory of all hogs and pigs on March 1, 2020 was 77.629 million head. This was up 4.0% from March 1, 2019, but down 1.3% from December 1, 2019. On December 1, 2019 the breeding herd was 6.471 million head. Three months later on March 1, it was 6.375 million head, or 1.5% lower. That’s a decline of 96,000 breeding animals in 13 weeks or a 7,385 head drop a week. While down from December, the March 1, 2020 breeding herd was still up slightly (0.4%) from March 1, 2019.
Through the first 12 weeks of the year, sow slaughter was up 7.6%, averaging more than 4,300 head a week higher than in 2019. Also, many herds may not be retaining as many gilts as normal. Still, it’s too early to speculate if producers are putting projects on hold or abandoning plans to build any new sow units.
The March 1, 2020 market hog inventory, at 71.254 million head, was up 4.3% from last year. This was 2.941 million head more than a year ago. Dividing that by 22 to 25 weeks (157 to 176 days) for nursery, growing, and finishing production, equates to about 117,000 to 131,000 higher hog slaughter per week. The 180-pound and over category was up 6.5%. Those hogs have already come to market. So the biggest slaughter surge is over. The remaining market hog categories averaged 3.8% above a year ago. They’ll come to market from now through August 2020.
The December-February pig crop, at 34.734 million head, was 4.7% above a year ago. The pig crop is ultimately a function of the quarter’s sows farrowed and the quarter’s number of pigs per litter. Sows farrowed were 1.9% larger than a year ago, but the litter rate came in 2.8% higher than a year ago.
Last December, USDA surveyed hog producers and reported expected March-May 2020 sows farrowing to be up 0.4% from the spring of 2019. In March, USDA asked producers for updated March-May farrowing intentions. The results were not much different than three months earlier-14,000 (0.4%) fewer sows expected to farrow than in spring 2019. Data collected for the survey reflected market conditions in the weeks leading up to and the first half of March 2020. Likely much of the pessimism flowing from the COVID-19 situation had yet to take hold.
Hog producers reported June-August farrowing plans down 141,000 litters or 4.3% lower than the same quarter in 2019. At first glance this may look like a sharp decline, or a significant sign of contraction. But remember, USDA’s latest report revised June- August 2019 sows farrowed up by 95,000 litters. Sows farrowed in June-August 2020 of 3.134 million, with commensurate pigs per litter, would still provide the second largest, only to last year, June-August pig crop.
Commercial slaughter and price forecasts
Table 2 contains the Iowa State University price forecasts for the next four quarters and the quarterly average futures prices based on March 26, 2020 settlement prices. The futures price forecasts are adjusted for a historic Iowa/Southern Minnesota basis. The table also contains the projected year-over- year changes in commercial hog slaughter.
To say this year so far has been tumultuous for the pork industry would be putting it mildly. At a time like this it is important to reflect on and recognize the unwavering resilience of producers and all throughout the supply chain for ensuring a continuous, safe, and wholesome supply of pork for consumers. The heroes in the entire US food supply chain should be commended.
Lee Schulz, extension livestock specialist, 515-294-3356, firstname.lastname@example.org