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| What are your expectations of hog
inventories and packer capacity for 2005? |
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| I anticipate that hog inventories
will grow throughout 2005. Producers were profitable in 2004 and
it appears that the feed supply will be large and affordable.
Signs of expansion appeared in the September report with a 1%
increase in the breeding herd. The sow herd continues to get more
productive which will add to the supply. The duties against Canada
will likely slow or end expansion in Canada until the March decision
is announced. If it stands, Canadian inventories will likely remain
stable to lower throughout 2005. Packer capacity, now rated at
approximately 408,000 head/day should be sufficient for this fall.
It is anticipated that it will exceed 415,000 once the new plant
is constructed in St. Joe, Missouri. The planned expansion could
test this level next fall. A three percent increase from the current
400,000-405,000/day slaughter level is 412,000-417,000 head, so
it should be close. |
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Hog slaughter in 2004 exceeded the 1999 record
by nearly 2 million head. Given extremely low feed costs due to
a record harvest and strong hog prices due to a big jump in consumer
meat demand, there is little reason not to expect another record
slaughter in 2005. Profits per hog in 2004 were the best since
1990. History provides few examples of hog producers being able
to resist the temptation to expand production when profits are
good. I'm expecting 2% more hogs in 2005.
Although the number of major hog packing plants
is holding steady, the nation's hog slaughter capacity is expanding.
Packers keep finding new ways to push more hogs through existing
plants. Packers slaughtered more than 400,000 head per day 13
times in 2004, including a record 407,422 hogs processed on September
7, 2004. Prior to this year, hog slaughter had exceeded 400,000
head in a single day only twice. Fifteen of the 17 largest slaughter
days ever occurred in 2004. Should profit margins provide the
incentive, packers can probably slaughter 410-415 thousand hogs
in a day.
Given the likelihood that producers will be
expanding production, one has to spend at least a little time
considering whether there will be adequate capacity to slaughter
all the hogs that producers will be sending to market in the fall
of 2005. Fortunately, a new large slaughter plant is expected
to open in St Joseph, Missouri in the fall of 2005. The Triumph
Foods plant will add 8,000 head to the nation's daily capacity
to slaughter hogs. If this plant opens on schedule, then packers
should have adequate capacity to handle next year's expected supply
of hogs.
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| What is your vision for the demand
of pork both domestically and exports for next year? |
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| Demand has carried the market
in 2004. Third quarter 2004 prices were approximately $20/cwt
carcass basis higher than they were in 3rd quarter 2003 on approximately
the same level of pork consumed. As we move forward, I look for
pork demand to weaken, relative to the recent trend, but remain
above average. Demand has been helped by a stronger economy, low-carb
diets, higher priced beef and strong exports (particularly to
Mexico). I believe that much of the boost from the low-carb diets
has already occurred and this growth may slow. Beef prices may
weaken as the U.S. border opens to Canadian cattle and beef exports
to Japan that will begin some time in 2005. These two events will
be competition for pork here and abroad. |
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This has been a remarkable year. Hog slaughter
is 2-3% higher than the year before, yet hog prices are up more
than 30% compared to 2003. The combination of higher slaughter
and higher prices can only be explained by an increase in pork
demand. In this case, both domestic and foreign demand for U.S.
pork was up in 2004.
U.S. pork producers benefited from a very favorable
trade situation in 2004. Nearly 10% of U.S. pork is being exported.
Through the third quarter, U.S. pork exports were up 23% compared
to last year's level. Shipments to Mexico, our second largest
foreign customer, were up a whopping 65%. U.S. pork exports to
Canada were up by 26%. Japan, always the number one foreign destination
for U.S. pork, bought 9% more than in 2003. Through September,
U.S. pork imports were down by 7%, thanks to an 8% drop in pork
imports from Canada. The odds appear good that 2005 will be the
14th consecutive record year for U.S. pork exports. However, it
appears likely that U.S. pork imports will increase next year.
Retail pork prices in 2004 have been great.
Each month from June through September saw a new record high for
grocery store pork prices. Consumer demand for pork was fueled
by record beef prices and the popularity of high protein/low carbohydrate
diets. The most important factor in hog prices is not how many
hogs are slaughtered. It's what is happening to pork demand. If
demand continues its current growth rate, 2005 will be another
fabulous year for hog producers.
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| What impact will the imposed duty
on Canadian hogs have on overall market prices both short term
and long term? |
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| Short term, I think there will
be very little affect on the number of pigs or hogs crossing the
border. One cannot change the housing or slaughter of hogs very
quickly. Prices may be more volatile for a period of time as buyers
and sellers negotiate who has to bear the cost of the duty when
the pigs cross the border. It is believed that Canadian producers
will bear most of the cost through lower prices as buyers begin
to factor the duty into the purchase price of the pigs. Longer
term, Canada will likely increase finishing and slaughter as producers
try to avoid paying the duty. If the duties result in a reduction
of the breeding herd in Canada look for stronger North American
pork prices that we would otherwise see. However, if the duties
are overturned or significantly reduced, the Canadian breeding
herd will likely continue to expand. |
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In the short term, the roughly 14% tariff on
Canadian hogs coming into the U.S. should slow, but not stop the
southward movement of hogs. The tariff began in late October.
Even so, it looks like a record 8 million Canadian hogs, including
5.6 million feeder pigs, will be shipped to the U.S. in 2004.
Since the tariff is a percent of market value, it provides a strong
incentive to keep slaughter hogs in Canada. It appears that Canada
has enough unused slaughter capacity to handle some, but not all
of the market hogs they have been shipping to the U.S. for slaughter.
Any reduction in the U.S. slaughter of Canadian-born hogs should
be offset by an increase in Canadian pork exports to the U.S.
and a reduction in Canadian purchases of U.S. pork. Therefore,
I don't believe the tariff will have a significant impact on the
available supply of pork in the U.S. in 2005.
In the long run, the tariff has the potential
to be very positive for U.S. hog producers by depressing the profitability
of raising hogs in Canada, thereby slowing their herd expansion.
The Canadian hog industry is one of the fastest growing in the
world. Much of this growth is based on exporting hogs and pork
to the U.S. The combination of this tariff and a stronger Canadian
dollar means that Canadian hog producers are not experiencing
a big jump in profitability this year like their American counterparts.
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