The main theme Allendale has laid out during most of this 2008 season is that hog futures are a little too bulled up. They will likely remain so until they get close to their expiration however. We certainly respect the idea that demand is great, which it is, but it will be hard to overcome the jump in supplies, which we are still dealing with. Pork production in the four quarters of 2008 will be 11%, 10%, 6%, and 0%. Our first quarter 2009 production forecast is down -4%.
Pork production will remain over last year's levels through September or so. It will equal (or post a small decline) 2007 levels by the fourth quarter. Futures are currently implying demand will overcome the supplies in the summer and really give an extraordinary boost to prices in the fourth quarter of this year. Keep in mind liquidation of the breeding herd started in March. A ten-month lag from liquidation until if affects pork production means it will be January until we clearly keep production levels down. In other words it is way too early for liquidation to help the fourth quarter. Does December really need the $22 (40%) price premium over last year?
So how far does production need to drop? In a recent Allendale morning commentary we noted we had been approached by one of the news wires to answer the question...how far would production have to decline in 2009 for hog prices to rise enough hit breakeven? We know cost, on a live basis, was $47 in 2007, it will jump to around $55 in 2008, and will hit $60 in 2009 with $6 cash corn. We are projecting live-based annual hog prices at $47 in 2007 and the same $47 in 2008. To hit that $60 breakeven in 2009 we would have to see a 32% price rally from 2008 to 2009! In the best-case scenario, our models suggest total pork production in 2009 would have to drop 6% to make that price rally happen. That assumes we hold all gains made in pork exports made this year. Let's see how that 6% drop could happen. We can take 1% off that figure assuming finishing weights decline. We can take another 1% off that number if imports of Canadian hogs drop 10% in 2009. Both of those factors are possible. That leaves US born hog slaughter to drop 4%. We have to respect US breeding herd productivity and assume pigs per litter increase 1%. That means US born hog slaughter needs to decline 5%. To get a 5% drop in US born hog slaughter we will assume the US breeding herd has to be around 4% lower at a minimum by December 1, 2008. The March 1 Hogs and Pigs report showed the breeding herd up 0.5%. Bottom line here is yes we can get back to breakevens in 2009. It will take a bit more blood than we think, but it is possible.
In the near term we want to make it clear we are respecting the fact this market simply wants to be bullish. The recent stories about Canadians slowing shipments of weaned pigs and bullish export data are exciting. Combine that with the shortfall in hogs China expects in June and July and bulls have reason to be really excited. In the short term we are letting them go for the gold all they want. For speculative positions we may even go long occasionally. However, our models suggest all of this good news will not be enough to overcome the supplies we are dealing with. The table listed below shows our real concern should be the extreme premium the fourth quarter futures have to last year. In the short term this market is back in the hands of bulls and will likely stay there until we get closer to expiration on the upcoming contracts.
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