With record hog and pig inventories – and litters continuing to swell – a panel of economists said Wednesday producers should consider looking to the futures market to lock in profits in late 2016 when supplies could exceed slaughter capacity.

U.S. inventory of all hogs and pigs Dec. 1 was 68.3 million head, up 1 percent from last December and the highest inventory on record since quarterly U.S. estimates began in 1988, according to the U.S. Department of Agriculture’s fourth-quarter hogs and pigs report released Wednesday afternoon.

The September-November 2015 pig crop, at 30.3 million head, was down 1 percent from 2014. Sows farrowing during this period totaled 2.88 million head, down 4 percent from last year, the USDA reported. The farrowing numbers for the quarter represented 48 percent of the breeding herd. The average pigs saved per litter was a record high 10.53 for the September-November period, compared to 10.23 last year, the report said

“It’s the third consecutive quarter that we have set records on pigs per litter,” Dr. Ron Plain, extension economist with the University of Missouri, said.

Plain was on a panel of economists dissecting the USDA numbers Wednesday afternoon for media via a teleconference organized by The National Pork Board.

The large number of pigs per litter is offsetting a declining sow herd, Plain said.

Kevin Bost, president of Procurement Strategies Inc., Chicago, said high weekly hog slaughter rates in fourth-quarter 2015 likely would be even larger in final quarter 2016.

“The average weekly hog slaughter, which by the way was a record 2.493 million (head) in the past week, should drop down to just short of 2.3 million in January, so we should get a pretty abrupt drop in hog slaughter right after the holidays,” Bost said.

But after a seasonal bottom in May, Bost predicted the industry could be looking at record weekly slaughter numbers again in fourth-quarter 2016.

“It does look to me like in November we’re looking at average weekly kills of in excess of 2.45 million and then in December about 2.53 million,” he said. “I think what we’re all kind of wondering about now is: ‘Fourth-quarter 2016, does the hog supply exceed the industry’s slaughter capacity?'”

The packing industry’s slaughter capacity is estimated at 2.461 million head per week, though that number is not set in stone as evidenced by last week’s record slaughter of 2.493 million head, said Steve Meyer, vice president of pork analysis for Express Markets Inc. Analytics of Fort Wayne, Ind.

“But I will say we’re very close to that capacity number and have been for three weeks now,” Meyer said. “I think we are going to be at or above capacity for several weeks next fall (based on this USDA report).”

The nation’s slaughter capacity isn’t likely to increase it time to offset those record numbers next fall, Meyer predicted.

“The two announced new large plants, one in Michigan and one in Sioux City, Iowa, are under construction, but they will not start slaughtering animals until the summer of 2017, so they won’t be up and running and available at any large numbers until the fall of 2017,” Meyer said. “… There are not going to be any big improvements in slaughter capacity that I know of between now and sometime in the summer of 2017.”

Breeding inventory, at 6 million head, was up 1 percent from last year and slightly more than the previous quarter, the USDA report said. Market hog inventory, at 62.3 million head, was up 1 percent from last year and up slightly from last quarter, according to the report.

The number of sows farrowing, as a percentage of the breeding herd, in the quarterly report caught panelist Daniel Bluntzer’s attention.

“The rate of farrowings was only 48 percent of the breeding herd. Last year it was 50.6 percent, so as the farrowing rate goes down it really takes a lot of hogs out of the mix,” Bluntzer, a partner in New Frontier Capital Markets, Corpus Christi, Texas, said.

But the economist said 48 percent is not typical, based on normal patterns.

“The longer term trend was for increases in the farrowing rate relative to the size of the breeding herd. Over the last couple of years we’ve seen that start to come down, with the exception of last year which likely had something to do with the PED (Porcine Epidemic Diarrhea) virus coming in,” Bluntzer said. “So that was a number that really hit me. Maybe you have to take that with a grain of salt a little bit because that means a lot to the numbers coming out in the next nine months. But it was very surprising and it really does cut into those pigs per litter coming up if you’ve got fewer sows farrowing.”

Though the panelists said producers are operating in the red now – well below an estimated break-even point of about $61 per cwt. for lean hogs – economists thought prices might be in the mid-$70s by summer before dropping to the mid-$60s by October and then lower into late 2016.

“Looking at what happened to the cattle market in the past year, we can see what a really nasty market you can have if there’s not enough capacity to go around …,” Bluntzer said, referring back to slaughter projections for the swine industry next fall.

The economists said producers likely would try and secure some profit margins through the futures market late next year.

“These numbers imply we’re going to have more hogs available in the fourth quarter of 2016 than in the fourth quarter of 2015,” Plain said. “… Futures markets are offering higher prices in the fourth quarter next year than what we’ve had this year. So, yes, I would argue that pork producers ought to think about locking in some of that.”

Bost agreed with Plain’s assessment.

“I can only guess whether or not producers will be locking up prices into the end of 2016, but it looks to me like something I would want to do if I were raising hogs,” Bost said. “Because you’re looking at futures prices in October around $65 or so and December $61 … with kill numbers like this, the cash market might be lucky to get $50 in the fourth quarter.”

Click here for the full USDA, December 2015, Quarterly Hogs and Pigs report.

Original article December 24, Pork Network

Economists weigh in on what USDA report spells for future markets