USDA’s June 24 Hogs & Pigs Report pegged the June 1 U.S. hog population at 68.381 million head, a record for this time of year. The indicated 1.8% annual increase reflected the surprisingly large (2.55%) increase in the spring pig crop, which implied a commensurate surge in hog supplies late this year. This could be bad news for hog producers, since the large supplies available in late 2015 were seen as being only slightly below packing industry capacity. We offer the following synopsis of 1998 events to illustrate what might happen if pork packers can’t handle the anticipated hog supply.
The U.S. hog population and pork production grew rapidly in response to strong 1996 prices, especially the surprisingly high levels sustained through the latter part of that year. The resulting herd expansion culminated in major supply increases in late 1998. Unfortunately, packing industry problems in Canada boosted imports of barrows and gilts during the second half of that year by about 25,000 head per week. Furthermore, a moderately-sized plant in Michigan closed that summer. The following chart puts the resulting 1998 hog slaughter totals in perspective.
The chart shows the increases weren’t especially large during the first half of the year, but the Canadian numbers apparently exaggerated second-half totals. Ultimately, the big kills seen in late 1998 simply overwhelmed the packing industry’s ability to process those animals. One packer twice ran its plants on Sunday to deal with the excess. As one might expect, the result was a drastic hog price decline despite the fact that wholesale pork prices didn’t fall nearly as sharply.
The second chart illustrates the disastrous price drop, which culminated in mid-December barrow and gilt prices on the hoof around 10.00 cents/pound and dressed basis quotes at 18.75 cents. Boar prices reportedly fell to about three cents per pound, so a large animal might have been had for under $15.00. It’s pretty safe to say most hog farmers would like to forget that living nightmare.
The ugly events of 1998 are pertinent because there’s a possibility of somewhat similar conditions late this year. Market sources suggest late-2015 hog supplies at least briefly tested packing industry capacity, with prices dipping to $52.87 on New Year’s Eve. The industry is now looking at late-2016 supplies averaging 2.5% larger than last year. When combined with news that a small South Carolina plant with a daily capacity around 3,000 head per day closed in May, this raises real concerns about the packing industry’s capacity to process the hog supply late this year. The following chart illustrates our tentative weekly slaughter forecasts for the second half of 2016. It shows weekly kills could bump up against total capacity around 2.5 million head per week for a sustained period. Thus, the market could prove quite vulnerable to price weakness at that time. Much depends upon the strength of consumer demand during the fourth quarter.
The good news is the situation will almost surely improve over the next two to three, since several packing firms are apparently set to build new plants or refurbish others by the end of 2018. First up is the 4,000 head per day facility to be opened by a fledging firm Prime Pork, a partnership between Glen Taylor, owner of the Minnesota Timberwolves, and Minnesota swine producer Greg Strobel. It’s scheduled to open late this year, but whether it will do so in time to alleviate the potential capacity problem is unknown. The fact that they’re refurbishing a beef facility might expedite the process.
Seaboard-Triumph Foods will reportedly follow with the opening of a 10,000-12,000 head per day plant in Sioux City, Iowa, next July. The third plant is planned by Clemens Food Group, which owns Hatfield Quality Meats based in Hatfield, Pennsylvania. It is being built in Coldwater, Michigan, and will have a 10,000-head per day capacity, with a scheduled opening date in late 2017. Finally, the fourth plant is to be built by Prestage Farms, with a mid-2018 target date for opening at this juncture. The facility was to be built in Mason City, Iowa, but the firm has shifted its focus to Wright County, Iowa, after that city’s city council rejected its former plan. It would also have an initial capacity around 10,000 head per day, with a second shift potentially boosting capacity within two years of opening.
Thus, U.S. pork processing capacity may surge by 34,000-36,000 hog per day over the next couple of years. Moreover, that might grow by another 10,000 head if Prestage adds a second shift. On a weekly basis, this suggests the weekly capacity (using a five-and-a-half day workweek) would rise from around 2.5 million/week in late 2016 to 2.65 million in late 2018.
While hog producers have to be worried about late-2016 price prospects, they can take considerable comfort from the planned packing industry expansion. That is, the additional plants imply pork packers will be forced to compete more aggressively for hogs over the next two years, which will very likely push prices to relatively elevated levels, especially during mid-summer, when supplies routinely reach annual lows. We seriously doubt they’ll challenge their 2014 highs in the absence of a major industry problem, but summer highs could push back above $1.00 per pound if U.S. hog herds don’t continue expanding in the interim.
