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Talk of hog supply contraction is premature
The United States Department of Agriculture’s December quarterly Hogs and Pigs report indicates the US hog industry was smaller and less productive in 2020 than in 2019. Whether the production slowdown continues remains to be seen, have you ever heard the saying, "two data points do not a trend make?"
From producer surveys, USDA National Agricultural Statistics Service tallied the December 1, 2020 US breeding herd inventory 3.0% lower than a year earlier (Table 1). That was the third year- to-year quarterly contraction in 2020. Before that, March 1, 2016 was the last decline compared to a year earlier, and it was minute. The most recent sustained contraction occurred between June 2008 and December 2010. While smaller, the US breeding herd at 6.276 million head remains the third largest December 1 breeding herd in 22 years.
Many factors may be pushing some producers to tap the brakes. Other producers may be setting the cruise. The list of drivers is long. Efforts to control COVID-19 fuel market volatility. Macroeconomic uncertainties persist in the US and global economies. Feed costs are up. Currency exchange rates and trade policy are in flux. These forces might reverse breeding herd growth since 2011, but potential also exists for stability in 2021 and for long-run growth.
Growth in litter rate slows
Breeding herd productivity, as measured by pigs saved per litter, dipped in the fall quarter. While causal factors are difficult to precisely pinpoint, lower litter rates could have come from higher disease incidence, labor challenges, and the makeup of the breeding herd. Litter size is usually smallest in the first litter, rises to a maximum between the third and fifth litter, and then remains constant or declines slightly with older parities.
Despite factors working against productivity, the 2020 marketing year (December 2019 - November 2020) litter rate was still record high, at 11.03 pigs (Figure 1). This was up 0.5% from 2019 and the first time the annual litter rate eclipsed 11.0 pigs nationally. This, however, was the smallest annual increase since 2003.
An obvious question is, 'will litter rates shrink?' Given continually improving genetics, technology, and management practices, it is probably safe to say that litter rates have not topped out.
Changes in litter rates vary among states. Culling under-producing females could explain, in part, the less than expected decrease in productivity or increase in productivity in some states. Producers idled some older operations that had health challenges before COVID-19. They may or may not be repopulated. Some producers permanently closed other sow farms to create efficiencies and maximize productivity within a production system. Some producers first stocked new sow units, capturing high health status on superior genetics in state-of-the-art facilities. Higher state-level litter rates will translate into higher national averages.
Canadian litter rates show room for growth in US rates. The 2015-2020 US average litter rate was 10.69 pigs. Canada averaged 11.58 pigs per litter. Part of the difference may be due to more favorable climatic conditions and the ability to space operations at greater distances than in the United States. Labor markets, work rules and management practices may contribute. The gap in productivity has been decreasing as genetics, technology and management are generally transferrable throughout North America.
Top managers excel in tough times
The sampling universe for USDA hog reports is hog owners and contractors with capacity to raise breeding or market hogs. USDA surveys large producers more heavily than small operations, but survey procedures ensure that all producers, regardless of size, have a chance to be included in the survey.
Until December 2017, USDA reported pigs per litter by size of operation. Unfortunately, this data series was discontinued. Those data showed the positive influence of large operations on the US litter rate. For example, in 2017 the average pigs saved per litter on all operations was 10.59. The average on operations with 5,000 or more head was 10.65.
Industry benchmark data show opportunities for further gains in productivity. PigCHAMP is one of many excellent swine production record software programs. PigCHAMP’s website provides publicly accessible benchmark summaries.
Between 2015 and the third quarter of 2020, the mean litter rate in PigCHAMP data was 11.25 pigs, compared to 10.69 in USDA’s Hogs and Pigs Reports for the same period. The median in the PigCHAMP data was 11.31. The upper 10th percentile turned out 12.17 pigs per litter. The bottom 10th percentile averaged 10.33 pigs per litter over the almost six year period. That 1.84 pig spread says room exists for improvement.
Looking only at 2020, the median and mean litter rates in PigCHAMP data slowed compared to 2019. Interestingly, the upper 10th percentile surged year over year, while the lower 10th percentile fell. In difficult times, the most productive got more productive.
Litter rates will continue to be a key factor driving US pork production in 2021 and beyond. Biological and economic factors will help dictate productivity levels. As 2020 illustrated, it is important to understand that optimal financial efficiency can mean a slowdown in productivity.
Farrowings give mixed signals on slaughter prospects
September through November 2020 sows farrowing were 3.164 million head, 1.0% lower than a year ago. Producers saved 0.4% fewer pigs per litter than in 2019, trimming the quarterly pig crop 1.4%. That suggests lower slaughter-ready supplies in 2021. But don’t count on it.
December’s second farrowing intentions for the December 2020 - February 2021 quarter were 1.6% above 2019 and up slightly from what producers told USDA back in September. Follow through could boost slaughter.
If producers do follow through on these intentions, the ratio of December 2020 - February 2021 sows farrowing to the December 1 breeding herd will be 50.8%, which would be the highest ratio ever for the quarter. This could indicate that the breeding herd estimate is too low, or the sows farrowing expectation too high. Historically actual sows farrowing have been higher than earlier intention estimates. Another explanation is the high ratio could be more a function of the revisions that USDA made to December 2019 - February 2020 estimates in order to reflect the number of hogs that came to slaughter during summer 2020.
The first set of farrowing intentions for the March- May 2021 quarter was 0.8% lower than the same period in 2020. Follow through could trim slaughter supplies.
Overall, the farrowing intentions do not imply any significant supply reductions, but remember these are intentions. Even in stable times intentions are just educated guesses.
Price signals mixed, too
COVID-19 really hurt farms that sell feeder pigs (40 lbs) or weaned pigs (10- 12 lbs). Disruptions weighed on these markets longest. Fourth quarter 2020 market hog prices averaged 9% higher than the same period in 2019. Feeder pig prices were 3% higher. Weaned pig prices advanced only 0.5%.
Fourth quarter 2020 formula weaned pig prices were 11% lower than in the same period in 2019 (Figure 2). Formula prices are often linked to the lean hog futures contract five months out. Differences in attitude at the two year ends were a huge factor. At the end of 2019 optimism for continued strong global and domestic pork demand hiked futures, which bolstered formula weaned pig prices. Such optimism did not exist in 2020’s fourth quarter, which let formula prices sag.
However, optimism persists in the cash market. Compared with October-December 2019, fourth quarter 2020, cash weaned pig prices were up 11% vs. down 11% for formula pigs. In December 2020 the spot cash market for weaned pigs was almost $6 per pig higher than the average formula price.
Markets can be fickle, especially the spot cash market. Futures prices and spot cash prices often respond first to changes in the hog market and therefore can serve as a pulse of the industry. For example, is finishing capacity adequate to support hog supplies? It currently appears to be. Should issues reoccur, pig prices may serve as a first signal of upcoming problems.
Commercial slaughter and price forecasts
Table 2 contains the Iowa State University price forecasts for the next four quarters. Prices are for the Iowa-Minnesota producer sold weighted average carcass base price for all purchase types. Basis forecasts along with lean hog futures prices are used to make cash price projections. The table also contains the projected year over year changes in commercial hog slaughter.
Lee Schulz, extension livestock specialist, 515-294-3356, firstname.lastname@example.org