As we begin 2016 and look towards the New Year, we find ourselves wondering what the future is in hog markets and profitability. 2 years ago now we predicted 2014 – The Year of the Pig Farmer. We believed record profits were coming and 2014 did have record profits. For 2016 we see a grinding year with some profits but mostly lots of work and lots of challenging scenarios.
Our Observations
- If we look at current 2016 lean futures and cost of production we come up with a potential profit of $15 per head. Not bad but not a mortgage lifter. The current profit scenario is not going to stimulate significant expansion.
- The December 1st USDA Hogs and Pigs Report indicated that the market hog inventory for all pigs under 180 pounds was the same as a year ago. That tells us that the huge year over year weekly marketings increases we have seen will come to an end soon. This will support lean hog prices.
- The September-November pig crop was about 400,000 head smaller than a year ago (30,632 million; 30,271). Less pigs born is not going to lead to more hogs to market.
- The December 1st US breeding herd was 6.002 million up 16, 000 form Sept. 1st. The ag-economists predicting a massive expansion have missed the mark so far. Most if not all the Ag-Economists never owned a pig and never will. If they got it so figured out why don’t they get out from their cubicle and put some of their own skin in the game? Hypothesis and Reality of market are not the same. Never built anything, never will. Nice people would never give them money to buy me a used car.
- US Country of Origin Labelling (COOL) has been repealed by the US Congress. This will be quite positive for Canada swine producers as it takes away restrictions in the US market that was hurting margins. We expect more pigs from Canada to USA. We don’t expect in 2016 this will lead to more pigs in USA – Canada combined. It will be a shift of production moving pigs to higher priced markets mainly pushed by a very low Canadian dollar relative to US.
- It’s interesting that in the first week of December the US National Average Weight was 215.97 pounds, three weeks later it had dropped to 213.44 pounds. This tells us that hogs are moving to market and maybe the record marketings are pulling the inventory lower. It also is probably a reflection of gross packer margins of almost $40 per head which encourages packers to get every hog they can.
- The strong gross packer margin of $40 tells us that pork demand is strong despite record hog marketings. The gross margin indicates to us as hog supply declines as the December Hogs and Pigs Report indicates, a rapid hog price increase will incur as packers try to hold market share.
- 2016 could see a large liquidation of sows in the European Union as many months of financial losses could lead to a decrease of up to one million sows. This in turn will lead to less pork for export and stronger prices.
- China’s hog price is $1.14 USD per pound live weight. More than $200 per head higher than the current US market. We firmly believe the coming months will see more pork to China and this will support US and Canada hog prices. China liquidated over 10 million sows, the hog price of $1.14 USD per pound is a reflection of the lack of supply caused by that liquidation. We believe in capitalism, Chinese entrepreneurs will import pork to China to make money. It’s already happening and that’s a reason US gross packer margins are strong.
- We expect the push to sow group housing will continue. There will be further pressure to have more “natural pork” with continued push to “antibiotic free”.
- We also believe there will be continued consideration by retailers and importers for pork that has more marbling, darker color, tenderness = flavour. There is and will be a domestic and global move to better tasting pork.
- On the genetic side, the consideration of using gene editing will become a conversation. Will consumers and retailers who are pushing for group housing and antibiotic minimization buy pork from gene edited swine?
- Other factors affecting supply is some strong PRRS breaks, some PED breaks and sow units affected by AI extender issues. All in all not huge market movers but factors that do affect supply. Maybe the major point, things can happen and are unpredictable.
- The major cost in production is feed at this time US feed prices appear to be stable. For foreign buyers and of US feed grains the strength of the US dollar makes costs higher. The US dollar index is extremely strong relative to other currencies. Last week at 98.22, 2 years ago now it was 81. The higher US dollar makes US pork and grains move expensive in most currencies. This is hurting export demand to a certain extent. The US dollar index is currently hovering near a ten year high.
Summary
2016 will be interesting. Lots of dynamics in play. We wish all a Happy New Year! No matter what as my father used to say “Christmas will be on the same day again this year.”
