Using USDA's National Hog Price Reports
Hog price data is used in myriad ways. In the short run, knowing
recent transaction prices is an aid in the price discovery process
as both buyers and sellers use price reports to determine prices
at which they are willing to buy and sell hogs. Longer term,
many industry participants use hog price reports to assess industry
and firm level returns. But determining prices most hog producers
receive for their hogs has become increasingly difficult.
When most hogs were sold on a live weight basis, at about the same price, it was possible to use one hog price measure for both price discovery and profitability analysis. So, for decades, terminal hog prices reported by USDA and private data sources were monitored as a price discovery aid and to monitor profitability. Later, as terminal market volume declined, many industry participants began using interior market quotes, such as USDA's Iowa-S. Minnesota live weight hog market, as a replacement for terminal market prices. But today's markets have moved beyond simple live, or even carcass weight, price quotes.
Mandatory price reporting changed the price reporting landscape. USDA began collecting and disseminating a variety of different hog price series, none of which were directly comparable to previously published hog price reports. This created a dilemma for hog producers and industry analysts alike because it was difficult to compare current price quotes with historical data. That's still a problem, but in many cases we now have about one year or more of historical price data available under mandatory price reporting, which makes it possible to at least make some limited comparisons over the last year. As a result, starting this month, we are making a transition to reporting hog prices based upon the National Daily Direct Prior Day Hog Report-Slaughtered Swine (LM_HG201) from USDA's Agricultural Marketing Service. Historical data from the report dates to early August 2001.
The "Slaughtered Swine" report provides information on base prices and net prices of all swine slaughtered the previous day. The report provides both base and net price calculations, based on how the hogs were priced. Since prices paid, net of all carcass premiums and discounts are included, net prices quoted on this report can be used to estimate industry profitability. Base prices are reported for hogs purchased via negotiation, swine or pork market formulas, other market formulas, and other purchase agreements. Weighted average base prices are reported for each category and across all categories.
Prices used to generate the U.S. National Base Hog Prices graph are a weekly average of the daily weighted average base prices reported across all categories. To put the national base prices in perspective, they averaged $51.58/cwt. during the first quarter and $47.47/cwt. during the second quarter. National base prices averaged $53.66/cwt. during July.
Since the "Slaughtered Swine" report collects price information after the hogs were slaughtered, it also provides information regarding average weights, backfat, loin depth and other quality variables. Prices used to generate the U.S. National Net Hog Prices graph are a weekly average of the daily weighted average net prices reported across all categories. To put the national net prices in perspective, they averaged $54.19/cwt. during the first quarter and $50.42/cwt. during the second quarter. National net prices averaged $56.45/cwt. during July.
Comparing the average base and net prices during 2002 provides a glimpse of average carcass premiums received by producers this year. During the first quarter, the average "premium" was $2.61/cwt. The average carcass premium was $2.95/cwt. during the second quarter and declined slightly during July to about $2.79/cwt.
Pork Production Larger Than In 2001
U.S. hog slaughter continues to run well ahead of a year ago.
During July, federally inspected hog slaughter averaged 3.4%
larger than a year ago. Following release of the June Hogs
and Pigs report, summer quarter slaughter was forecast to
rise 4 to 5%, so slaughter this summer has been on the low end
of expectations. Hog weights have been heavier than last year,
but during July averaged just 0.2% above July 2001, compared to
a forecast increase of nearly 1%. As a result, pork production
during July averaged just 3.7% above a year ago compared to expectations
for a 5% increase.
Hog Prices Flat During July
Hog prices were relatively flat during July, although wholesale
pork prices strengthened moderately. National base prices averaged
$53.69/cwt. (carcass weight) the first week of July and were just
$0.41/cwt. higher the last week of July. USDA's pork cutout value
averaged $57.44/cwt. in early July, but rose about 3% during July
to a $59.17/cwt. average the last week of the month.
Sow Slaughter Rises
Low hog prices this past spring encouraged some pork producers
to start reducing their breeding herds. Up through mid-May, there
was no evidence that low hog prices were having much impact on
U.S. hog producers breeding herd and farrowing decisions. For
example, the sow slaughter four-week rolling average was just
2.9% larger than last year in mid-May. But that started to change
during June and July. For example, during the four weeks ending
on July 13th, sow slaughter averaged 11.5% above a year ago.
The rise in sow slaughter suggests that some producers are starting
to reduce breeding herd numbers in response to low hog prices.
Gilt slaughter data collected by Glenn Grimes at the University
of Missouri also indicates that some breeding herd reduction is
underway.
The change in sow and gilt slaughter did not come early enough to have much impact on June farrowings, according to USDA's Monthly Hogs and Pigs report, released on July 26th. USDA indicated that June farrowings were up about 1% compared to last year and that the June pig crop was about 1.5% larger than a year ago. It might be September before the confirmation of a breeding herd decline shows up on USDA's Hogs and Pigs report. If confirmed, the breeding herd reduction is not expected to result in a year-to-year slaughter decline until spring 2003.
Pork Trade Update
Pork exports have fallen below a year ago throughout most
of 2002. Through May, U.S. pork exports were 6.6% smaller than
in 2001, when U.S. pork exports were inflated by Europe's FMD
problems. Pork exports were 14% smaller than last year during
May, and averaged 9% below 2001's during April-May.
Pork exports are likely to remain soft the rest of the year, due in part to Japan's decision to put the Safeguard back in place until March 31, 2003. The tariff effectively raises the price Japanese consumers pay for U.S. pork by about 25%. Imposition of the Safeguard tariff was apparently triggered by a large increase in Japanese pork imports during June, as imports during April-May were not large enough for Japan to impose the tariff.
Net pork exports this year have fallen sharply from last year's level as pork imports rose at the same time pork exports were declining. Net U.S. pork exports (export minus imports) from January-May totaled 245 million pounds, down 30% from last year's 350 million pounds. The reduction in net pork exports reflected not only the modest decline in pork exports, but also a 17% increase in pork imports. The year-to-year pork import increase was largely the result of trade resuming with Denmark. Last year, FMD brought a halt to most Danish pork exports.
Hog imports from Canada continue to run well ahead of last year. Through May, the U.S. imported 2.46 million hogs from Canada, 18% more than a year ago. Although imports of both feeder pigs and slaughter hogs have been larger than in 2001, feeder pig imports (+30%) have been growing more rapidly than slaughter hog imports.
Futures Based Cash Price Forecasts
Futures prices, adjusted for basis expectations, are a source
of continuously updated cash price forecasts. As an example,
Western Corn Belt barrow and gilt price forecasts based upon futures
prices at the time of this writing (7/26/02) settlement prices)
adjusted for basis expectations are included in a graphical format.
Basis forecasts are based upon the most recent three-year average
basis for Western Corn Belt barrows and gilts. To provide some
indication of the amount of risk present, forecasts based upon
the most positive and negative basis of the last three years are
also included. Weekly updates (in graphical form) of these price
forecasts are also available on the K-State Livestock &
Meat Marketing Web Site (www.agecon.ksu.edu/livestock) in
the weekly electronic publication entitled Hog Price &
Supply Graphs.