Pork Supply Expectations from Latest USDA ‘Hogs and Pigs’ Survey

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USDA published last Thursday the results of its quarterly survey of hog operations, offering an updated view of the supply of hogs on the ground. We will try to break down what the numbers imply for hog/pork supplies the rest of the summer, fall and winter market. The consensus of analysts after the report was that it was largely neutral. However, futures were higher following the release, in part because the numbers were not worse than what was already priced in the market. The survey also reaffirmed that producers are at least doing one of the things necessary to support prices going forward – limit supply. Whether that continues given lower feed costs and the need to walk corn off the farm (i.e. feed to livestock) is likely going to be a topic of debate in the coming months.

Short term supply implications: USDA breaks down the inventory of market hogs into four groups, which allows us to get a better idea as to the timing of when those hogs will be marketed.

June through mid July: This is when the inventory of hogs over 180 pounds will come to market.   Slaughter so far has been running 2.5% above year ago levels. If USDA survey is right, slaughter in early July will remain around 2.4 million head, about 2% higher than a year ago.

Mid July through late August: There is a bit of variability here since slaughter in late July tends to hit annual lows and then trend higher through August. The USDA pegged the inventory of hogs between 120-179 pounds at 2% above last year. This would imply weekly slaughter of around 2.4 million hogs through early August and then climb to around 2.45 million/week in the second half of the month.

Late August through mid October: Slaughter tends to be higher the last week of August as producers seek to market hogs before the Labor Day shortened week. USDA estimates the inventory of hogs between 50-119 pounds to be up 1.2% y/y. If this is correct, it would imply slaughter after Labor Day and into mid to late October of around 2.6 million head/week. This would start to approach the capacity constraints now that the Tyson plant in Iowa has ceased operations.

Late October through November: Inventory of light weight hogs (under 50 pounds) was estimated 1.4% above year ago levels. If correct, this would imply a weekly slaughter for non-holiday weeks approaching 2.7 million head, requiring more shifts to process hogs on Saturday. We think this will result in a wider spread between hogs/cutout than the last two years.

Winter and beyond:  We continue to hold that the breeding herd offers the best indication with regard to future supply although the shift in productivity in the last four quarters has been a more significant factor. Prior to the report analysts thought herd would be down 2.2% from a year ago but higher than in March. The USDA survey showed no change from March to June, suggesting a lower rate of gilt retention. Our estimates suggest that gilt retention was lower than what we normally see during this time of year and 2.5% lower than the same quarter last year. Producers have been struggling with profitability and while prices were high in March and April, the sharp decline in May was a reminder that they need to keep supply in check if they have any hope of bringing a margin back in the business. As of June 1, the breeding herd was 3.2% lower than a year ago. The survey pegged intended farrowings for Jun-Aug to be down 2.5% from a year ago. The ratio of farrowings with the June 1 breeding herd was 49.3%, consistent with the past two years.

Will pigs per litter offset lower farrowings, like they have done in the past 12 months? We don’t think so. Pigs saved per litter during Mar-May were 1.8% higher than the previous year but below the pre-COVID trend line. If Jun-Aug follows the same trajectory, it would imply almost no change y/y in pigs per litter (they were above trend last year) and thus a net reduction in hog slaughter during Dec-Feb and potentially Mar-Apr.

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