Current Situation and Analysis - 10/6/2019

Monday, October 7, 2019
Record Hog Numbers and Pigs per Litter

On September 27, 2019, USDA NASS released the September 1 Hogs and Pigs Report, which reported total U.S. hogs and pigs at a record 77.678 million head. Total hogs and pigs were 3% above last year and at the highest level since the estimates began in 1988. Industry analysts were expecting total hogs and pigs to rise about 2.9% year-over-year to 77.315 million head. June-August farrowings (3.179 million head) and September-November farrowing intentions (3.155 million head) are both slightly below a year ago (down less than 1%), while December-February farrowing intentions were flat. Pre-report estimates were unchanged to up by about 1%.

The record hog numbers were supported, once again, by the stellar performance of pigs per litter, which were 11.11, an improvement of 3.6% compared to a year ago levels, and 1.0% growth over the June 1 report of 11.00 pigs per litter. Pre-report estimates on June-August pigs per litter ranged from 1.2% to 4.1% above 2018’s, with an average rise of 2.4%. Given the flat farrowing intentions and robust pigs per litter the June-August pig crop was 2.9% above year ago at 35.306 million head. 

Flat farrowing intentions but improving pigs per litter are supporting strong growth in hog slaughter numbers. Weekly slaughter is tracking about 3.9% above year-to-date levels. The strong slaughter numbers are impressive given the fact that shipments from Canada are down 5.5% year-to-date (about 200,000 head) due to PEDv cases. Year-to-date, barrow and gilt dressed weights have been slightly (0.7%) above last year at an average of 211 pounds. In recent weeks, dressed weights have jumped by one to two pounds, which is worth watching in the weeks to come. Rising hog weights combined with growing hog slaughter numbers has led to pork production rising about 4% year-to-date. Much of that increase is being absorbed by foreign demand. Year-to-date pork exports are about 4% above last year indicating that U.S. product is filling some of the supply gap created by the spread of African Swine Fever (ASF) in Asian countries.

The dramatic improvements in U.S. production efficiency point to growing slaughter numbers well into 2020.  That has implications for slaughter hog prices. Seasonally, hog prices decline during the fourth quarter, and as of the first week of October 2019 base slaughter hog prices were at about $60 per cwt. Iowa State University’s farrow-to-finish estimated returns have shown profits for the last six months with August reporting $24.60 per head and breakeven carcass prices at about $61-$64 per cwt. The December futures contract was trading near $70 per cwt last week. In turn, the February contract was trading around $75, which provides some opportunities over current cash prices to improve profitability in the near term. Trade and the spread of ASF will continue to be market factors moving into 2020, but the ramp-up in U.S. output may moderate prices compared to futures market expectations.


Estimated Cattle Feeding Returns and Breakevens

On a monthly basis, feedlot closeouts were positive for the first five months of this year and then turned negative. That assessment is based on feeding-out a 750-pound steer in a commercial Southern Plains feedlot and assumes animals sold on the cash market (i.e., no hedging and does not include premiums incorporated into quality carcass-based pricing programs). Red ink ballooned in September largely driven by the lingering impacts of early August Kansas beef packing plant fire. LMIC estimated he September return at -$150.00 to -$155.00 per steer, the biggest loss since October 2016.

The forecast is for closeouts to post less red ink in October and November, and to be back in the black for December. If the Kansas plant re-opens as announced (by early January 2020), and Mother Nature does not dish-out another very harsh fall and winter, as 2018-19 did for many U.S. cattle feeders, LMIC projects positive closeouts for the first five months of 2020. Breakeven sales prices for February through May of 2020 are in the $113.00 to $116.00 per cwt. range. At this time, feeding-out 750-pound steers that are scheduled to be marketed in mid-June through mid-September looks like a breakeven proposition at best. That is, would be a loss if all economic costs are considered. Of course, it is common for that timeframe to be the least profitable.

September 1 Grain Inventory Large But Below Expectations

USDA-National Agricultural Statistical Service (NASS) estimates for the September 1 (end of the crop year for fall harvested crops) inventories of grain and oilseeds were below market expectations in a report released on September 30. The U.S. corn inventory was pegged at 2.114 billion bushels, 1% less than a year ago. Expectations ranged from 2.3-2.5 million bushels. Corn prices in the futures market moved from $3.72 to $3.92 per bushel for December delivery the day following the report.  Soybean stocks on September 1 were 913 million bushels, a record for the end of a crop year. Market expectations for soybeans ranged from 940 million bushels to nearly 1.040 billion bushels.  Soybean prices for November delivery went from $8.85 on the morning of the report release to $9.20 at the close of trading the following day.

There were some curious aspects of the corn inventory estimates. Based on the amount of corn exported and used for food, seed, and industrial uses during the prior three months, along with the amount of corn that was in storage on June 1, the implied quantity of corn that was used for animal feed and an amorphous concept known as “residual disappearance” was above 900 million bushels for the June-August interval. That was the largest June-August corn feed and residual usage volume since the summer of 2005.

Based just on price comparisons during similar years, the price implications of large feed and residual usage during the summer are not clear-cut. In 2005, nearby corn futures prices averaged $2.04 in September and finished the year with a December average of $2.02. Summer quarter corn feed and residual usage also were large in 2006 and 2007, relative to the years since then. Corn futures prices in September 2006 averaged $2.42 per bu., but then moved up to a December average of $3.68. In 2007, the nearby corn futures contract went from a September average of $3.51 to a December average of $4.24.