Livestock Marketing Information Center State Extension Services in Cooperation with USDA

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1 Analysis & Comments Livestock Marketing Information Center State Extension Services in Cooperation with USDA May 3, 2018 Letter #18 Hog Situation and Outlook: Dressed Weights Adding to Production Increasing trepidation has become the phrase in describing the hog market outlook. From a supply standpoint, inventory counts and slaughter forecasts have been largely on-track, posting year-over-year increases. The surprise has been the year-over-year increase in carcass weights. The cutout value also has been weaker than expected. In fact, since the beginning of February, it has slid counter seasonally lower. In April, the pork cutout value was $68.11 per cwt. (-9%) below year ago and dropped $17.52 (20%) compared to the prior five-year average ( ). As usual, hog prices are expected to increase on seasonally lower pork production this Spring and into the Summer quarter. However, look for both producer and processor per head margins to erode compared to 2017 s. Hog Inventory and Dressed Weights The latest USDA NASS Quarterly Hogs and Pigs report (as of March 1, 2018) showed the U.S. hog inventory up 3.1 % from last year s. Hogs kept for breeding increased, along with the total number of market hogs and the future breeding plans. Although by all accounts this report was not a surprise to analysts and was in line with pre-report estimates, it still showed continued increases in pork production headed for market in Commercial pork production has increased since 2014, posting year-over-year gains between 7.3% and 1.8%. LMIC forecasts peg 2018 commercial pork production up 4% year-over-year and surging 16% since 2014 s annual total. The U.S. hog industry has undergone some changes in that timeframe, adding slaughter capacity and increasing exports by 11%. It s also important to note that the declines in 2014 and 2013 were not market-based, and were the result of PED virus moving through the U.S. The long-term trajectory of pork production has been increasing since the 1980s. Figure 1 shows the annual U.S. commercial pork production numbers. The increases in pork production per sow have been driven by a couple of factors, reproductive efficiency being the major long-term factor. Rather continuous gains in pigs per litter are supplemented by increasing carcass weights so that each breeding hog the U.S. produces 4300 pounds of meat, nearly double the amount in the early 1990 s. Figure 2 shows the gains in pork production per breeding hog.

2 Page 2 Figure 1: Annual Commercial Pork Production. Figure 2: Annual Pork Production Per Breeding Hog.

3 LMIC Page 3 Are we backing-up hogs? Dressed weights have generally increased over the years, but vary seasonally, declining from the first to the third quarter, losing 4-5 pounds per carcass. Prior to 2013, annual dressed weights increased, jumping 3.5 pounds in 2000, and then gaining about 1 pound per year between 2001 and In 2014 the annual average jumped 6.75 pounds and has been declining since. As mentioned earlier PEDv, played a large role in production behavior that year. Prices were higher because of limited supplies and adding weight to hogs was profitable. This year, barrow and gilt dressed weights through the week of April 14, 2018, averaging 1.9 pounds higher. In the most recent week, barrow and gilts dressed weights jumped another 1 pound higher on than the previous week, reaching 213 pounds per carcass on a dressed basis. Importantly, this is the same pattern followed last year, see Figure 3, but we are approaching the point in the year where seasonal declines should be expected. A year ago, dressed weights broke in the third week of April. It s not just a timing issue. Last year at this time hog dressed weights were averaging on a weekly basis 0.64 pounds below The LMIC detailed some of these concerns regarding dressed weights in a recent Daily Livestock Report, stating that every pound increase in dressed weights per hog will add about 0.5% to annual pork production over 2017 figures. Current forecasts place a 4% year-over-year production gain are accompanied by an average increase of 1 pound in carcass dressed weights. Dressed weights will need to moderate to track with these estimates. Figure 3: Weekly Dressed Weights

4 Page 4 One of the theories behind higher dressed weights earlier in the year was that new capacity in finishing barns led to new hogs not pushing out slaughter-ready hogs. In other words, there was slack in the system that was allowing hogs to remain in barns a bit longer even though inventory was up. That seems reasonable to some extent, note that that a one pound increase in dressed weights is equivalent to a few extra days on feed, and to accomplish the sector-wide gain of in dressed weights this practice (both expansion and additional days on feed) would need to be quite prevalent and consistent. It seems that this could be true in some cases, it likely is not the only driver. Genetic improvement also is likely playing a role as well as market prices. Approximately 45% of hogs are sold per week on swine or pork market formula and another 15% or so on sold through other types of market formulas. These formula contracts offer some wiggle room, and can have flexible delivery windows. Both the cutout and the live market prices have been sliding for the last 10 weeks. Seasonally, hog prices usually rally around this timeframe and carry higher prices through the summer. It may be that the gain seen in the dressed weights was producer inaction waiting for prices to make their seasonal turn. Hog slaughter in the first 18 weeks of the year has been larger than year ago by 3.8%. This number was implying slaughter levels quite a bit smaller than Quarterly Hogs and Pigs would imply over the last two quarters, but in recent weeks have caught up. Heavy weight market hogs on December 1 were 4.3 % above a year ago, followed by 3.9 % higher for that same category on March 1. Barrow and gilt slaughter is up 3.2% year to date. However, this recent week jumped 6.5% above last year catching up barrow and gilts to align more closely. Earlier slaughter levels and weights would suggest some market hogs may have been held back, but the most recent week could be implying that is no longer the case. Adjusting Margins Producer profitability turned negative in March of 2018 (-$9.34 per finished hog), according to the Iowa State University monthly calculations (link is: ). A typical seasonal price rally this Spring would take profitability black into the black. However, by the fourth quarter higher feedstuff costs combined with lower slaughter hog prices suggest tight gross margins and likely back into red ink in terms of farrow-to-finish profitability. Even though slaughter hog prices have posted year-over-year declines, the drop has been buffered by the narrowing of processor gross margins. That is, the live-to-cutout price spread (including byproduct value) has declined compared to a year earlier. On a per slaughter hog basis, for the first four months of 2018, the processor margin was just over $8.00 per animal below 2017 s. Still, processing hogs remains profitable, but not as much so as in 2016 and 17. There may have been some interaction of slipping margins and recent trends in carcass weight increases. As noted earlier, recent year-over-year increases in barrow and gilt dressed weights represent only a few more days being added to the finishing phase.

5 LMIC Page 5 Price Outlook Murky The outlook for hog prices comes with some questions. Although we have not seen the start of the seasonal rally in hog prices, it will emerge, but the question is how high will the rally be and how long will it last? That will likely answer some of the questions regarding dressed weights, too. Do weights return to similar weights of a year ago and will that be enough to curb already large production gains from ballooning? With 4% higher production forecast and modest gains in dressed weights, prices are already expected to register below a year ago. Pushing tonnage even marginally higher could have rippling effects, in part because so much of the export side is up in the air. In this article, we haven t spent a lot of time on exports, in part because the trade landscape is changing rapidly with updates. Many of the major U.S. pork export destinations have been engaged in trade talks with the U.S. (China, KORUS, NAFTA, TPP-15) or have been negotiating with our competitors (Japan-EU). This remains a wild card, but if extra tonnage ends up on the domestic market, prices could continue to stall this year, even with a seasonal gain. Looking beyond 2018, higher supplies are still expected in However, farrowing intentions may change if hog prices move into the $50s this fall and/or corn prices move significantly higher (e.g., over $4.25/bu in Midwest cash markets). Even if feed costs do rise significantly, it may not result in tightening supplies of barrows and gilts. New barns built for new packing capacity are likely to fill those barns to spread overhead. Expectations are that 2019 will still show larger supplies but may not be as high as the 2.7% increase shown in the table. Table has the most up to date hog forecasts, which is listed below and can be found on the LMIC website (Members Only tab) at QUARTERLY COMMERCIAL HOG SLAUGHTER, PORK PRODUCTION, PER CAPITA PORK DISAPPEARANCE AND NATIONAL BASE HOG PRICE 05/03/ % Chg. Average % Chg. Comm'l % Chg. % Chg. Carcass Price % Chg. Year Comm'l from Carcass from Pork from Per Capita from National Wtd from Quarter Slaughter Year Ago Weight Year Ago Production Year Ago Consumption Year Ago Avg Base Year Ago (1,000 Head) (Lbs.) (Mil. Lbs.) (Retail Wt.) ($/Cwt.) 2016 I II III IV Year I II III IV Year I a II b III IV Year I II III IV Year a/ Estimated quarter Note: Totals may not add due to rounding. b/ Forecasted quarters Sources: Livestock Slaughter - USDA Publications; USDA Livestock Market News; Forecasts - LMIC Projections