Q&A with Economists — You Asked. They Answered.

NPB coordinated a panel of economists to answer pork producers’ questions about pork markets and the December Hogs and Pigs Report, which was released Dec. 23, 2022.

Participating economists include:

The views expressed in this news post by our invited guests are theirs and not those of the National Pork Board. The National Pork Board does not advocate or endorse any particular production or marketing direction.

Can you share a summary of the December Hogs and Pigs Report?

The U.S. breeding herd inventory on December 1, 2022, was 6.154 million head. This was up 0.5% from December 1, 2021. This was the first year-over-year increase in the national swine breeding herd in 2.5 years.

The hog inventory cycle has three phases ― expansion, liquidation and turnaround. This may be a sign of the turnaround phase. Or looking at it another way, maybe the next expansionary phase is not as far out on the horizon as was foreshadowed with the September Hogs and Pigs report. 

In the short run, how many hogs and pigs are on the ground is what matters. Current and pipeline supplies along with the demand situation, determine prices. The December 1, 2022, market hog inventory, at 66.966 million head, was down 2.0% from last year. The 180-pound-and-over category was down 1.9%.

By the time a Hogs and Pigs report is released a good portion of these hogs have already come to market. The remaining market hog categories are also about 2.0% below a year ago. They’ll come to market from now through May. Tighter supplies will be supportive of prices. 

The last two Hogs and Pigs reports have been very accurate with respect to market hog inventories. This might actually be an understatement. We need to give credit where credit is due.

This means producers responding to surveys and USDA’s National Agricultural Statistics Service conducting surveys, analyzing data, and publishing inventory estimates. Over the 17 weeks stretching from the beginning of June to late September when the September Hogs and Pigs report was released, hog slaughter was down 0.92% from the same period the year prior. 

The June Hogs and Pigs report indicated hog slaughter would be down 0.70%. From the beginning of September to the week ending December 10, 2022, hog slaughter was down 1.48% from the same period last year. The September Hogs and Pigs report indicated slaughter would be down 1.41%. 

Farrowing intention estimates are used as an indication of slaughter from six to twelve months in the future. Producers intended to have 2.947 million sows farrow during the December 2022-February 2023 quarter, which would be up 1.0% from the actual sows farrowing during the same period one year earlier and 45,000 litters larger than the December through February expectations in the September report. Intended sows farrowing for March-May 2023, at 2.981 million sows, would be up 0.5% from the same period one year earlier. 

These plans can change after USDA surveys are taken because of changes in actual or expected prices for hogs, changes in costs or expected costs and as a response to the current industry-wide hog production plans revealed by the survey. This is particularly true for first estimates of farrowing intentions. One purpose of the estimates of farrowing intentions is to provide information on current production plans so that individual producers can make adjustments if they choose. 

— Dr. Lee Schulz

What are the supply implications for winter and spring of 2023 ?

The number of market hogs on December 1, 2022, was estimated to be down 1.355 million head or 2% from the same period a year ago. This implies fewer hogs coming to market during Q1 and much of Q2 of 2023 than the same period in 2022. 

Pork buyers will find tighter supplies both because of the normal seasonal decline from fall to spring and the net decline in inventory.

During the fall non-holiday weekly slaughter was around 2.57 million head.  Based on the latest survey, we would expect weekly, non-holiday slaughter during Jan-Mar to average around 2.42 million head/week, 155k head/week less than in the fall. 

Weekly hog slaughter in April and May last year averaged around 2.38 million head per week. The latest USDA survey tells us to expect 2% fewer hogs during this period or 47,600 fewer hogs every week.

Normally buyers look to build inventory during Q1 to offset the seasonal decline in supply during late spring and summer.

U.S. exports are also strong in Q1 as foreign buyers also recognize that U.S. pork supplies are seasonally lower in Q2. Any delays in exports or inventory building could put more pressure on what’s expected to be a tight pork supply next spring and summer.    

— Altin Kalo

What are the supply implications for summer and fall of 2023?

Breeding herd size and expected farrowings offer some direction for supply later in 2023. The breeding herd number was a bit of a surprise as most analysts were expecting a year-on-year decline.

The USDA survey estimated the breeding herd on December 1 at 6.154 million head, 0.5% higher than last year. The modest increase from 2021 suggests that gilt retention during the Sep-Nov quarter improved compared to the same period last year.

Our take is that producers were pleasantly surprised by how resilient hog prices were for much of 2022.

While the value of some pork items sold at wholesale declined and export demand to China was soft, packers paid more for hogs in 2022 than they did in 2021.

Cash hog prices were $13/cwt higher (+15%) and the CME cash hog index was 6% higher. A higher breeding herd coupled with a modest improvement in the farrowing rate had producers forecasting a 1% increase in farrowings during the Dec-Feb period. Add to this a modest increase in pigs per litter and the latest survey suggests summer hog numbers that are a little over 1% higher than in 2022.

As for next fall, the survey points to hog slaughter which is less than half a percentage point than what we saw in 2022, a modest increase that is not enough to keep up with domestic population growth.    

— Altin Kalo

Will pork production be up in 2023?

Yes, but I believe all of the year-on-year growth will come in Q4.

My forecasts, based on USDA’s December Hogs and Pigs report and historical productivity relationships, indicate that commercial hog slaughter will be less than 1% lower in each of the first three quarters and then 3.6% higher in Q4.

That jump is based on my belief that we will see modest breeding herd growth in the first quarter and a return to roughly 1% annual growth in pigs saved per litter. I believe dressed weights will increase modestly (0.3%) in 2023, adding slightly to production.

My forecast is for Q1 and Q1 production to be roughly 0.6% lower than in 2022, Q3 production to be the same as last year and Q4 production to be nearly 4% larger.

USDA’s December Hogs and Pigs report was quite close to analysts’ pre-report expectations, implying that the information was likely “in” the market at the time of the report’s release.

Lean Hogs futures price declines this week would say the report’s inventories were low relative to traders’ expectations at this time. I believe the market inventories and farrowing intentions imply marginally lower slaughter and production through the third quarter.

Assuming that the breeding herd in the December report is correct at 100.5% of its year-ago level and that that kind of growth persists this year, I think fourth-quarter slaughter could be as much as 3% higher than 2022. That level of slaughter will tax our existing slaughter capacity in light of the pending closure of Smithfield’s Los Angeles, CA plant.

My calculations suggest that current Lean Hogs futures prices are attractive for Q2 onward, especially if producers use a strategy that allows them to participate in any upward movement of futures contract prices.

I believe breakeven costs for average producers will remain in the mid-$90s/cwt. carcass for at least the first three quarters of 2023.

— Dr. Steve Meyer

Are pork prices and demand strong enough to incentivize hog farmers to expand production in 2023?

Futures prices are telling producers to expand. But expansion decisions are made not simply on near-term profitability but also on the outlook down the road.

It appears more and more likely that we could see a recession in 2023, the depth of which is unknown at this time. That could keep some producers on the defensive.

Protein demand usually takes a hit during a recession although pork is not as vulnerable as other meat proteins with more exposure to food service. 

The Supreme Court decision on California’s Prop 12 is also a factor. Some producers may be waiting for some finality on this before they plan on expanding.

High feed costs, a tight labor market and high labor costs also work against any significant expansion plans. 

For now, producers are in a maintenance phase, which means only modest supply growth for the next 12 months. 

— Altin Kalo

How will inflation impact market prices?

Dr. Steve Meyer published a very insightful article on the topic in National Hog Farmer on August 15, 2022. To summarize “… keen observers should always look beyond ‘inflation’ as the reason for price changes… These strong prices are partially due to inflation and partially due to strong consumer level demand.” 

Drs. Glynn Tonsor and Jayson Lusk, in an August 2022 report prepared for the National Pork Board looked at what caused an increase of over 27% in retail pork prices from January 2020 to May 2022. The authors found that general macroeconomic factors were responsible for 50.2% of realized retail pork price increases. Meanwhile, inner-industry supply-side factors resulting from increased production costs drove 30.8% of the observed price increase and consumer demand factors resulting from increased willingness-to-pay contributed to 19.0% of realized retail pork price increases. 

The Consumer Price Index (CPI), released by the U.S. Bureau of Labor Statistics, is a collection of items from multiple sectors of the economy to form a singular basket of goods so prices can be compared over time and the effect on U.S. consumers can be monitored. The inflation rate is the change of the CPI from one year to the next. The November 2022 inflation rate was 7.1% which was all items, not seasonally adjusted, November 2022 CPI of 297.711 divided by the November 2021 CPI of 277.948.

USDA published the early-release tables from the “USDA Agricultural Projections to 2032” on November 7, 2022. The complete report is due to be released in February 2023. They provide U.S. macroeconomic assumptions which reflect data from the U.S. Bureau of Labor Statistics, International Financial Statistics International Monetary Fund, IHS Global Insight, Oxford Economics Forecasting, as well as estimated and projected values developed by USDA’s Economic Research Service.

These projections have inflation at 3.1% in 2023. Similarly, the Food & Agricultural Policy Research Institute at the University of Missouri, project U.S. CPI inflation at 3.3% in 2023. Accordingly, this would be a two-year cumulative inflation, 2021 to 2023, of about 10%. The last time this occurred was from 1988 to 1990 and before that was in the late 1970s and early 1980s. 

— Dr. Lee Schulz