The First Power In Genetics

October 30, 2006

By Jim Long, Senior Vice-President, Genesus Genetics

USA-Canada Inventory Report – No More Hogs

We have been bullish for a sustained length of time about US hog prices. The cornerstones of this premise have been no more pigs are being produced, increased packer capacity and ongoing increases in pork exports. Again, this week, further concrete evidence that the North American hog supply is not growing.

	2005	2006	2006 as % of 2005
Kept for Breeding	7,620	7,699	101
Market	69,149	69,143	100
Sows Farrowed	3,803	3,779	99
Pig Crop	34,815	34,783	100

No matter how you look at it, the United States and Canada combined statistics show no more hogs coming to market. The combined market inventory is 6,000 head lower than a year ago. The combined pig crop was 32,000 head smaller than a year ago. Though both are amazingly close to the year before, the bottom line – no more hogs.

The breeding herd statistics indicate year over year an increase of 1%, but this is counter-balanced by a 1% drop in the number of sows farrowed. Not exactly a testimonial for increased productivity growth, is it? The September combined USA and Canada breeding herd was 7,699, exactly the same as June’s number (7,699). We have felt that the increased sow slaughter and relative lack of new sow barn construction was adding up to no expansion. These numbers seem to back up this premise. After 32 straight months of profit, we have a restrained industry. Why?

Most of the 32 months of profit have gone to filling the equity hole dug deep by the low hog prices experienced for much of 1998 to 2004.
As production base that has not yet forgotten the gut wrenching experience of going back $20+ per head when prices were low.
The ongoing labour challenge. Finding and keeping good people. The loss of productivity by continual training while only getting by with marginal knowledge workers. It gets tiring.

New building costs and permitting challenges. Building costs have increased 25+ % with no measurable productivity advancements. Consequently, new barn breakevens are near historically high yearly price averages. The time and cost to get building permits in most jurisdictions is restrictive. The wealth of our society is such that the economic plans of swine production are minimalized by so-called quality of life parameters. At the end of the day, no one wants hog barns next door.
A new factor compounding growth is the new price list for feed. After several years of almost static feed costs the sticker shock of feed prices the highest in a decade is pushing breakevens up and profits down for people who don’t grow their own feed. Just last week bankers asked us to do breakeven scenarios with $5 bushel on a potential re-population. Have to say, we haven’t heard this request in almost a decade.

Canada Inventory

All of the above factors of why there is no growth in the Canada-USA inventory are magnified in significance with some other factors when we look at the Canada situation. Following is Canada’s inventory report for September.

Hog Inventories
October 1, 2006
<	Breeding			Market Hogs					Total Hogs
<	2006		2006 to 2005	2006	2006 to 2005	2006	2006 to 2005	2006		2006 to 2005
<	<	<		Under 20 kg		20 kg and Over			<	<
<	000 Head		% Change	000 Head	% Change	000 Head	% Change	000 Head		% Change
Canada	1,620		-1.7	4,295	-4.0	8,223	-6.6	14,137		-5.3
Atlantic	32		-5.4	96	-6.8	196	.01	323		-2.6
Quebec	405		-3.9	1,275	0.6	2,250	-15.1	3,930		-9.4
Ontario	431		-2.6	1,102	1.2	1,947	-11.4	3,480		-6.7
East	868		-3.3	2,473	.05	4,392	-12.9	7,733		-8.0
Manitoba	379		1.9	926	0.6	1,693	4.7	2,998		3.0
Saskatchewan	136		1.8	305	-32.3	879	7.2	1,320		-6.0
Alberta	216		-3.1	518	-13.5	1,186	-2.7	1,920		-5.9
B.C.	21		-1.9	73	59.0	72	-27.6	166		-0.6
West	752		0.3	1,822	-9.6	3,830	2.0	6,404		-1.8
Note:	Figures may not add up to totals due to rounding

Canada’s market inventory on September 1st is down 5.3% from a year ago. Canada’s market inventory of 12,518 is the lowest since 2001. The inventory is lower due to record small pig exports to the USA (up 15% ytd). A smaller pig crop, 4% lower than a year ago (2005-8,366 and 2006-8,056). It is not complicated – have fewer born, ship more smaller pigs to the US and in Eastern Canada have rate of death loss due to Circovirus double normal (re: Statistics Canada) and you have less hogs.

In the last few weeks we have discussed the restructuring intentions of Maple Leaf Foods and Olymel, Canada’s two largest hog packers. The restructuring is an indication of the degree of upheaval in the Canadian Pork Industry. The earlier factors of why there is no expansion in the continental pork industry are augmented in Canada by the appreciation of the Canadian dollar. When coupled with a 50% export dependency, higher packer kill costs, relatively high feed costs in some parts of Canada (Quebec and Atlantic). Prohibitive labour costs in the oil rich province of Alberta ($20 per hour on farm) and last but not least lower hog prices. For example, a week ago Quebec slaughter price was over $20 per head lower than Manitoba’s ($1.39 versus $1.14/kg). It doesn’t take a rocket scientist to see why Manitoba’s market inventory is up 4.7%, while Quebec’s is down, -15.1%. Follow the money trail.

We have been adamant in the past that there was going be no expansion and likely liquidation in Canada. The Canada October 1st breeding herd is 1,620 – 28,000 fewer than last year’s 1,648. The pendulum of Canada’s production has changed. We expect the Canadian breeding inventory to decline another 30,000 plus (3-4%) over the next 6 months. The losses will be in Quebec, Ontario and Alberta. We expect that Manitoba will have more sows than Quebec a year from now. Currently Quebec has 405,000 and Manitoba 379,000.

Going forward, we expect to see more smaller pigs leave Canada, as a percentage of total productions. The good news for US producers is that these small pigs will meet the needs for packers and finishers without expanding the continental hog supply, a factor that we will be overall price supportive.

Packers

US packers increased kill capacity. We are now marketing some days over 420,000 head. The battle of the players for market share has been fierce. Some have wondered which US packer would falter. The effects of this battle and the flow of hogs and pork continentally and internationally appear now to show the victims. It is not a US packer but Olymel and Maple Leaf in Canada. Both are restructuring. Both are losing money. Plant capacity will be lost in Canada not the US. Currency valuation, plant size and export dependency is rationalizing the market place. It is hard and it’s cruel but it’s reality. It is a continental and global market place.

Conclusion

There will be no more hogs in Canada and the US combined in the foreseeable future. We expect 50 cents per lb US live weight hogs average until the fall of 2007. If you produce your own feed, your cash flow will be good. If you buy your feed, hope you had it bought.
Market

The Iowa-Minnesota lean hog price last Friday averaged 62.16 (46 cents per lb live weight). The USDA pork cut-out was 67.06 – both good prices with weekly marketings of 2.182 million. 30,000 more than the same week a year ago. Iowa-Minnesota weights a week ago averaged 267 lbs – 1.1 lbs lower than the same week a year ago (268.1). This weight differential is quite positive. There is no way hogs are backed up – they are more current. It is our bet weekly kills of over 2.150 million are pulling hogs ahead. Its great to have packer capacity of over 42,000 head a day. With December lean futures at 64.60 Friday it’s a good indication of the market’s price confidence in cash hogs through the rest of the fall.

“You can accomplish anything in life, provided that you do not mind who gets the credit.” ----------Harry S. Truman