Harrington's Sort & Cull

Late-Year Hog Bearishness Sinks In

John Harrington
By  John Harrington , DTN Livestock Analyst

Bad news is never easy to deliver, no matter how talented you may be in the art of sugar-coating. The great comic Steve Martin once quipped about a doctor who tried hard to backload a dire diagnosis, first telling his patient, "The good news is that we're naming a disease after you."

Pretty funny as gallows humor goes. Not so much if it's your name that becomes synonymous with incurable.

Though the June 1 hog inventory unveiled several weeks ago did not exactly constitute a death knell for pork producers, some of the totals were considerably less than appetizing. Specifically, the softest rotten apple in the barrel was the enormous spring pig crop and the serious market challenge it stages for pork producers in the fourth quarter.

Thanks to a combination of greater farrowing activity (up 1.5%) and an increase in pigs per litter (up 1.1%), March-May pig production surged to 30.35 million head, 2.5% greater than last year, 5% larger than the 2011-2015 average, and populating the largest nursery since before 1994.

If late-week carcass weights hold near steady with 2015, the eventual harvesting of this historically big class of pigs will cause commercial pork production in the fourth quarter to jump to roughly 6.6 billion pounds, 2%-2.5% greater than the prior year. Of course, given the way corn prices are sinking like a stone, it's not difficult to imagine the possible reality of heavier carcasses and even greater late-year tonnage.

While deferred lean futures seemed substantially braced for bad news just before the quarterly assessment was released (e.g., October closed at 71.95 on June 24, 1,210 points below spot July), they opened sharply lower the following Monday. In other words, few initially disputed the report's bearish supply implications.

Yet something worked to trigger a brief period of denial. For nearly a week, the board actually bounced higher by nearly 200 points, temporarily supported by profit-taking, oversold charts and wishful thinking that stronger pork demand evident through the first half of 2016 could be extended, or even grow, over the next several quarters.

Unfortunately, the bearish potential of the spring pig crop has recaptured the market news headlines this week, driving several lean contracts to multi-month lows. October through February closed on Friday far below 100-day moving averages with December settling at its lowest point since mid-January.

Ever since inadequate shackle space in late 1998 drove butcher prices into single digits, fourth-quarter bears have periodically raised the horrible possibility of market numbers overwhelming slaughter capacity. More times than not over the years, such talk has been closer to scare tactics than realistic assessment of chain speed stress.

Barring major mechanical problems or some unforeseen plant closure, I don't see serious problems on the late-year horizon. Yet the extra larger spring pig crop will certainly require a higher level of Saturday kill through the fall than we saw last year. And for packers to "find" the space and weekend energy required, they will no doubt insist upon very generous margins.

For their part, producers can further minimize the threat (i.e., talk or real) of overworked plants through aggressive marketing and maintaining super-current finishing floors. That's why we need to closely monitor weekly scale checks, hoping that they trend lower through late summer for as long as possible.

(CZ)

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