Harrington's Sort & Cull

Threading the Needle

John Harrington
By  John Harrington , DTN Livestock Analyst
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Between the steely clamor of plant construction and the elevated squeal of farrowing barns, the first half of 2017 reverberated with the confusing din of hog and pork expansion. In those rare moments when packers, producers, and market analysts could actually hear themselves talking, the most common conversations mused over the questionable probability that greater late-year shackle space would effortlessly dovetail with larger market hog numbers.

In other words: Could complicated blueprints at the opposite ends of the production chain find a way, either by professional design or just blind luck, to successfully thread the needle?

Let's be clear. Perfect coordination in this regard was not likely to be equally pleasing to packers and producers alike. On one hand, if packers cut the ribbon on new kill floors before a proportionate increase in finished barrows and gilts surfaced, the cost of live inventory might easily jack sharply higher, tanking the potential of decent processing profits.

Bad news for packers (especially those gathering outside numbers), but good news for producers.

On the other hand, if larger finishing floors needed sweeping before greater slaughter capacity was fully available, live prices could plummet as producers were forced to take a number before boarding the next available train.

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Bad news for backed-up hog sellers, but good news for selective buyers with more leverage than Tom Brady taking a knee at the Super Bowl.

As we move deeper into the final quarter of the year, it seems clear to me that the needle threading process has been less than perfect. In fact, if you look at the strange gyration of the live hog trade since late summer, it seems like would be threaders have taken turns missing from both sides of the eye.

The first failed attempt started in early August when waves of market-ready hogs (i.e., weekly records exceeding 2.4 million head) struggled to find slaughter homes. As live numbers continued to accelerate at a faster pace than kill capacity, country prices sank like a lead balloon with the dressed carcass base collapsing by more than $25 between late August and late September.

It was producers turn to benefit from the second botched attempt, the ongoing mismatch with processing facilities now growing at a faster rate than the fall supply of ready hogs. Accordingly, the market stage has been set for a rare October rally with the cash index pushing more than $10 higher over the last three weeks.

So where do we go from here? Perhaps toward greater equilibrium by early December. At least we know of some timetables and scorecards that point in that direction.

In terms of maximizing slaughter capacity, there appears to be a good shot that both new plants at Sioux City and Coldwater will be running close to full tilt (i.e., both processing nearly 10,000 head on a daily basis) by Christmas. And in terms of peak market hog numbers for the quarter, weekly supplies should approach 2.6 million head at least by late November.

Of course, all bets are off as we move into 2018 and points beyond -- at least when it comes to blindly matching infrastructure with farrowing plans. To be sure, we're sure to periodically see awkward tangos between plant capacities and country supplies in the years to come.

Yet the next time you see such price-moving disconnects, there should be specific markets incentives or disincentives to blame

For more from John see www.feelofthemarket.com

(CZ)

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