Source: Tom Johnston, MEATINGPLACE, 12/26/16

The U.S. pig count again exceeded expectations, with analysts left to marvel over the industry’s sustained production gains but doubt producers' profitability, as large supplies signal continued low prices and call for help from additional slaughter capacity coming online in the second half of 2017.

USDA said on Friday that the U.S. inventory of all hogs and pigs on Dec. 1 was a record 71.5 million head. This was up nearly 4 percent from Dec. 1, 2015, and up slightly from Sept. 1, 2016. Analysts polled by Urner Barry expected a year-on-year increase of almost 2 percent.

The September-November 2016 pig crop, at 32.3 million head, was up nearly 5 percent from 2015. Analysts expected just a 1.5 percent increase.

Market hog inventory, at 65.4 million head, rose 4 percent from last year, up slightly from last quarter, while analysts expected a 2 percent increase.

Chris Hurt, professor of agricultural economics at Purdue University, said the numbers and market reaction certainly show more pork than anticipated, but that the roughly 4 percent increase in supplies shouldn’t exceed an estimated 2.5 million head-per-week slaughter capacity in the first half of next year. Based on weekly slaughter levels in the first and second quarters of 2016, at 2.25 million and 2.14 million, respectively, adding 4 percent to those levels won’t exceed 2.5 million. And large plants coming online in the second half of 2017 will add more capacity to help buoy prices.

“I think that’s one of the important things we’re going to be looking at, bringing on pork processing capacity in the second half of 2017,” Hurt said. “I think one of the price-depressing factors that we saw from this past fall, and that we’re just completing now, was that capacity was just too short and probably had some implications on lowering hog prices.”

John Nalivka, an agricultural economist and president of Sterling Marketing in Vale, Ore., said he doesn’t see capacity relief coming until the fourth quarter of 2017. But he noted that producer farrow-to-finish margins have improved significantly in recent weeks, to a $5-to $10-per-head loss, on higher hog prices, compared with an average $31-per-head loss from Sept. 17 through the first week of December. (Conversely, packers in that period were making a profit of $45 per head.)

The latest report’s numbers proved producers were willing to forge ahead, Nalivka said.

“We’ve got new capacity, relatively low feed costs and a pretty good export market ... . If you look at those three things, … those continue to be the incentives to drive this expansion and produce more hogs going out into 2018,” he said. “… Going forward, I think most of us are pretty convinced we’re not going to have the kind of pork prices we saw this year and that we’re going into an era of lower pork prices … . It’s going to get interesting in the first three quarters next year with these hog prices to see if the producer can make any kind of positive margin.”

Breeding inventory, at 6.09 million head, was up 1 percent from last year, and up 1 percent from the previous quarter. Analysts only expected a 0.2 percent increase in the breeding inventory.

Sows farrowing during this period totaled 3.04 million head, up 4 percent from 2015. Analysts predicted an increase of just 0.004 percent.

The average number of pigs saved per litter was a record high 10.63 for the September-November period, compared to 10.53 last year.

“We are seeing gains in productivity,” said David Miller, Director of Research and Commodity Services, who doesn't see the trend stopping given improving genetics technology. “Looking at this report, we see that litters per sow, compared to a year ago, were up about 1.8 percent, pigs per litter is up another 1.6 percent and even though weights are down a little this year compared to a year ago, we’re seeing about [a] 2.9 percent [gain] in total pork productivity coming out of the breeding herd.”

U.S. hog producers intend to have 2.97 million sows farrow during the December-February 2017 quarter, up 1.4 percent from the actual farrowings during the same period in 2016, and up 3 percent from 2015. Analysts expected a slight dip of 0.004 percent in the year-on-year figure.

Intended farrowings for March-May 2017, at 3.00 million sows, are up 1 percent from 2016, and up 5 percent from 2015. Analysts projected a 0.5 percent increase.

As for price forecasts for 2017, based on the national daily base slaughter cost of 51-52 percent lean hogs, Hurt sees $56 (per hundredweight) in the first quarter, $66 in both the second and third quarters, and $56 in the fourth quarter. The average would be $61 for 2017, compared with about $60 for 2016.

“I’ve actually got a little bit higher prices, which seems really strange with more pork coming to the market,” Hurt said. “I’m basing that on retail prices of pork dropping somewhat more; that’s going to help us on the demand side of pork. I’m looking at the marketing margins that … were quite extreme in the second half (of 2016). I think this really depressed the farm price of hogs, and I think in the third and fourth quarter we’ll overcome bigger supplies and actually could add some to the price levels. And also … probably a 5 percent or so increase in pork exports.”

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