Where are the hogs?

Last month I discussed the idea of hope. Hope that hog futures might continue to grind higher. Hope that demand for U.S. pork will continue to improve and hope that the inventory of pigs on the ground was being consistently overstated by the USDA. While the jury is still out regarding a shift upward in pork demand, it appears that my outlook for fewer hog numbers than expected is on the mark.

The quarterly Hog and Pig Report issued Sept. 26 and showing pig inventory as of Sept. 1 indicated that kept for market hog inventory was up 1% from last year. The market hog weight break down showed pigs 180 pounds and over were up 5%, 120-179 pounds up 3% while the two ligher weight categories were down 1% and down 2% respectively. This gap in hog numbers was suspect when reported.

My comments last month speculated that the USDA had likely been over-counting hogs, in some fashion. My discussion went into an analysis of hog weights and space in the system to justify my reasoning. I will say that many discounted my comments as inaccurate.

The weekly kill in the first week of September was up nearly 4% from last year. Since then, hog numbers have fallen dramatically behind year ago levels. The last three weeks have shown weekly hog slaughters roughly even with last year, or 5% lower than projected by the Hog and Pig Report. Futures have rallied as I predicted they would. But the rally is likely not over, perhaps not even close to being over.

The question looms large, if the USDA projections are 5% overstated for the 180 pound and over category, how much overstated is the 120-179 pound category? How about the lighter hogs showing numbers this winter running below last year. Does this mean butcher hog supplies this winter will be running down 3% to 5% from last year?

My theory regarding a shifting demand curve for U.S. pork due to an inflation wary consumer trading down at retail remains unproven. U.S. pork exports have been robust, and data supports this. The hog industry has been bleeding, losing equity for more than 12 months. Lower feed costs have certainly helped to lessen the losses, but they have not stopped them from occurring. Additional contraction is needed. The September Hog and Pig reported the kept for breeding herd down 2% from last year but up 36,000 from June. It’s interesting to note that Smithfield Foods, the largest hog producer in the U.S., recently indicated that their pork production would be down 20%.

As it becomes crystal clear to everyone that the Hog and Pig Report is woefully wrong, consistently over-counting hog numbers, look for hog futures to continue to move higher. If it becomes evident that pork demand is shifting (increasing) a substantial rally will occur.