MORE PIGS ON THE WAY
Prepared by Richard A. Brock & Associates, Inc.
For better or for worse, the long awaited and predicted hog expansion has taken place–and at a fairly rapid rate. The September Hogs and Pigs report indicated that sow numbers from a year ago have increased by 3%. More important, is that expansion in the hard-core Midwest is now taking place, reversing the trend of the last two or three years. Sow numbers are down in only three major hog producing states from a year ago. Illinois is down 5%, Ohio is down 9% and Missouri is off 15%.
On the plus side, Oklahoma increased its breeding herd by 31%, Minnesota is up 11% and Iowa countered with an 8% increase.
What's truly amazing is when you take a look at the trend from ten years ago (see chart), North Carolina has increased its breeding herd by 328%, bringing it easily to the number two hog producer in the nation. Oklahoma has increased by 600%, propelling it into the top ten hog producing states. Although the trend has now turned, Minnesota is one of the only key Midwestern states to have sow numbers today larger than they were ten years ago. Ohio, Indiana, Illinois and Iowa have all shown considerable declines in the last ten years.
Farrowings To Increase
The real news in the September Hogs and Pigs report wasn't the fact that hog numbers have increased only slightly–it's the fact that farrowings and farrowing intentions are increasing rapidly. The report indicates 5% more litters were farrowed this summer. September/November farrowings are expected to be up 7% from 1996 and producers told the USDA they would like to farrow 8% more litters during the December/February quarter. This is not hard to believe when you consider the fact that sow slaughter has been low enough the past several months to support a 6% or 7% rate of expansion.
Adding to the increase in farrowings, today's producers are getting more efficient and more productive in pushing out pigs. Reproductive performance has seen about a 2% improvement every quarter for the past several years. Even this summer, while farrowings were up 5% from last year, the June/August pig crop was 7% larger. A record 8.73 pigs were weaned per litter nationwide in August. Farms with 2,000 head or more are approaching the nine pig per litter mark, while farms with less than 100 hogs had a weaning average of only 7.5 pigs per litter.
What Does This Mean For Price?
About three years ago, we developed our own computer model for forecasting hog prices. While nothing in the world is perfect, the graph is somewhat frightening when you look at the consistency between the model's forecast and the actual Iowa/Minnesota average cash price.
More specifically, what you'll see in looking at this chart is that there is a distinctive trend between the model and actual prices. For example, prior to 1995, average cash prices tended to be slightly lower than the forecast price. Since 1995, as a whole, average cash prices have tended to be slightly higher than the model. But most importantly, the direction in trend indicated by the model has been frighteningly accurate.
Part of the reason for the shift in relationship between actual prices and the model in the last 2½ years may well be a reflection of changes in cash contracts being offered to producers in most areas of the country. More and more producers are receiving a premium relative to local cash markets as a result of reaching certain production specifications.
What Does This Mean From Here On Out?
Early this spring when cash hogs were trading over $60.00 and the model was forecasting that late in the third or early in the fourth quarter we could start seeing hogs under the $50.00 mark, most producers refused to believe the forecast. Now, reality has set in. The last few weeks have proven once again that approximately every four to five years it pays to be an aggressive hedger and/or forward cash contractor in the hog market. Unfortunately, if history repeats itself, this trend is not yet over. In the downturn of 1993 to 1994, it paid to be hedging hogs for about six quarters in a row. We have only now gone through two quarters where hedging hogs has paid off handsomely.
At this stage we have to believe that the fourth quarter estimate of $46.89 will be in the ballpark of the average for the next three months. The first quarter of next year is the real scary one. The model forecasts cash hogs at slightly under $41.00. But unlike many other forecasts that we have seen showing that cash hog prices could stay in the low 40's during the second quarter as well, our model indicates that we should see a fairly healthy rebound in prices between April and June of next year bringing the market back up into the mid to high $40.00 range.
What To Do
For those of you who have been following our hog recommendations, you know very well that we have been extremely aggressive on the short side of hog futures for the last six months. This past week we recommended taking profits on all hedges that covered production through the second quarter of 1998. Why? Hog futures prices between now and then have already discounted cash hog prices into the low 40's. The market is very oversold and at this price level in the futures, the downside risk, in our opinion, seems to be relatively small. However, should prices rebound sharply over the next several weeks, any opportunity to lock in first quarter hogs in the mid to high $40.00 range and second quarter hogs in the high $40.00 to low $50.00 range should be taken advantage of. This market is going to be very wild, even compared to historical standards, over the next several months. Knowing your breakeven production costs, combined with good business common sense, demands locking in profits on at least part of your production. It will pay off dividends over the next six months. Be prepared to hedge more hogs.
October 3, 1997Richard A. Brock & Associates, Inc.
2050 W. Good Hope Road, Milwaukee, Wisconsin
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