This is a question that has been worrying the market for several months. There has been widespread speculation that slaughter would be up so much that the industry would strain slaughter capacity. A look at how third quarter slaughter compares to the Hogs and Pigs data might provide a clue to potential fourth quarter slaughter.
Hogs that are slaughtered in the third quarter usually come from the Dec/Feb pig crop, which the USDA estimated at up 10.0% from last year. The June Hogs and Pigs report showed a 13.4% increase in the number of hogs weighing over 180 lbs as of June 1st, with an 11.5% increase in the number of hogs weighing 120-179 lbs. The 110-119 lb weight group was up just 8.7%. Analysts generally assume that most of the heaviest weight group will be slaughtered by the time the report is released, leaving the next lighter weight group to supply the hogs for July into August. Hogs weighing 50-110 lbs are expected to be slaughtered from mid August through September. While the two heaviest weight groups showed a larger percentage increase than the Dec/Feb pig crop, the lighter weight group was down quite a bit. When taken in total these three weight groups are 10.8% larger than last year. This is a bigger increase than the pig crop would imply, and indicates that the USDA may be forced to revise its Dec/Feb pig crop higher at some point if third quarter slaughter justifies a bigger number.
How has slaughter since the first of June compared to the report? Weekly slaughter of barrows and gilts from the first week in June through the July 4th weekend averaged 12.0% larger than last year compared to the 13.4% increase in the heaviest weight groups. While that is a little “short” of the weight group figure, it is more than what is implied by the Dec/Feb pig crop. Barrow and gilt slaughter the week ending July 11th was up 11.7%, fairly close in line with the 120-179 lb weight group.
The USDA says that its estimate of the pig crop will be within 2.2% of the actual barrow and gilt slaughter two out of three times. That means that one third of the time, actual slaughter will be “off” by more than that. That is a big window when it comes to forecasting just how many hogs are out there.
The Mar/May pig crop generally provides most of the hogs for the fourth quarter. The June report showed the pig crop up 7.5% from last year. This figure would seem to imply an increase in slaughter no more than 9.7% from last year, but it could be up as little as 5.3% assuming that we stay with in the two thirds “error term of the report. The fact that the 50 lbs and under weight group is up just 6.5% would seem to point to a slightly smaller increase than what is implied by the pig crop. We are uncomfortable assuming that, however, since the USDA has chronically underestimated the size of pig crops since the end of the PEDv crisis. We think the safest course is to assume that the USDA’s estimate of a 7.5% increase in hog numbers for the fourth quarter is accurate. The fourth quarter has an extra slaughter day compared to last year, so the increase is spread out over more days. That should put daily average slaughter rate up 2.5% less, or about 6%.
Slaughter rates usually peak in late November/early December. Our 6% increase in daily average slaughter puts the weekly total at around 2.45 mill head. Slaughter capacity for the industry is roughly 440 thsd head a day according to our sources. That gives a 5 day weekly total of 2.2 mill head. That means that packers would have to slaughter 250 thsd head on Saturday’s at the peak, to the rest of the hogs that are available. This is very doable, but does not leave much wiggle room. If hog numbers are larger than what the USDA is suggesting in the June report, we could end up with a period of time during the fourth quarter when numbers do actually exceed slaughter capacity.