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Making sense of hog inventory revisions

chayakorn lotongkum/Getty Images Pigs in pen
INVENTORY MANAGEMENT: USDA revised its previous estimates in the latest Hogs and Pigs report, which makes analysis of what's happening on the production side more complicated.
New estimates complicate analysis of production trends.

USDA significantly revised previous estimates in its December 2021 quarterly Hogs and Pigs report. Going into a report, analysts and traders pit pre-report guesses against previously reported USDA estimates. When USDA revises its previous estimates, the baseline changes. Percent changes in pre-report guesses compare to the old base line. Percent changes in USDA’s report compare to the revised baseline. That complicates evaluating how much expansion or contraction is actually occurring.

One longtime analyst likens comparing pre-report guesses to USDA’s revised estimates as moving the goal post 3 yards to the left, just as the football leaves the place kicker’s toe. The ball may still split the uprights, but not likely down the middle.

The trade generally expected a slowdown in production. USDA’s December 2021 report was largely in line with expectations. However, clarifying how much pork producers are pulling back will take additional data.

Biology drives inventory relationships

USDA does not publish direct survey indications or other raw inputs it uses to estimate hog and pig inventories. It does provide detailed information regarding the inputs and the methodology it uses to incorporate all data sources.

The goal is to find numbers that satisfy a set of biological and accounting constraints. These logical requirements relate current inventory to past inventory, relate current and past inventories to production data such as hog slaughter, and reflect the hog growth cycle. Under ordinary conditions, these relationships and outcomes are reasonably predictable.

USDA uses a balance sheet to reflect the production constraints. For example, a pig takes about six months from birth to slaughter. That means it is not possible to slaughter more hogs than there were pigs six months earlier.

The supply components of the live animal balance sheet are the beginning inventory, births and imports. From this supply, USDA subtracts the disposition or use components. They are commercial slaughter, farm slaughter, deaths and exports. The result is the estimated inventory number on hand at a point in time.

Shocks can alter production patterns

Unpredictable deviations from equilibrium complicate estimating hog and pig inventories. Shocks, such as disease outbreaks, can greatly affect production. Other shocks include natural or other disasters, economic policies, rapid structural changes, new technologies or other disturbances that cause sudden shifts in hog inventory — whether from the event itself or from producers’ responses.

COVID-19 brought unparalleled slaughter disruptions in April and May 2020. The last time the industry saw such wide year-over-year swings in weekly slaughter was in 1975. During the 1970s, surges and dips in weekly slaughter of 20% and 30% from the same week a year earlier were not unusual. Firms that were “in” hog production when conditions were profitable and “out” when profits turned to losses drove those slaughter swings. Today, excluding shocks, large year-over-year swings in slaughter are in the single digits. Hog production is a highly controlled, measured process.

Nationally, 2020 slaughter did return to typical levels by June, roughly seven weeks after the processing disruptions began. Still, a major backlog of pigs existed. Producers implemented nutritional and other management strategies to relieve some pressure on pig flow. Those moves did not resolve all the issues. Stepped-up summer 2020 slaughter helped work through the backlog by Labor Day.

Pork producers have wrestled with a new variant of porcine reproductive and respiratory syndrome (PRRS) since late 2020. Disease outbreaks can reduce litter rates. They can also affect feeder pigs. Mortalities typically diminish once pigs reach a certain weight. In addition to pig losses, disease outbreaks can make hog weights more variable. Lower rates of gain slow movement of hogs through the stages of growth, which complicates tallying point-in-time inventories by weight group.

Trueing up the baseline

Each December, USDA procedures allow for revisions to the previous eight quarters of hogs and pigs inventory estimates. Some numbers may have already been revised once or more. The largest changes in the official statistics usually occur during the process of the first revision. The change may, for example, reflect the impact of an event that had either a larger or a smaller effect than thought at the time. In periods of disequilibrium, USDA may revise official statistics a second or third time.

USDA made notable revisions from the report released on Sept. 24 to the latest one on Dec. 23, 2021. They trimmed the September-November 2019 pig crop by 5.2%, or 1.86 million head. These pigs would have been expected to be slaughtered during the April-June 2020 period — which was, of course, during the height of pandemic-related slaughter disruptions.

USDA upped the June 1, 2020, market hog inventory by 0.3% — with the category of 180 pounds and over being decreased 2.0%, and the 120- to 179-pound category being increased 3.2%, reflecting slower growth rates. The Sept. 1, 2020, market hog inventory for pigs weighing over 50 pounds was reduced 0.9%, while the inventory of pigs under 50 pounds was increased 0.4%, bringing inventory estimates better in line with slaughter levels during the last four months of 2020.

Over the last quarter, USDA chose to raise the September-November 2020 pig crop by 1.1%, with the increase coming from 33,000 more sows farrowing. Producers logically upped the number of sows farrowing in response to the new PRRS variant to get enough pigs to fill facilities.

Another confounding factor for USDA in estimating inventories is that during times of increased disease incidence, producers typically find it profitable to feed hogs to heavier weights. The reasons include using available on-farm capacity and capitalizing on favorable hog prices. Hog weights in 2021 were 0.3% behind the same period in 2020, but 1.6% above the 2015 to 2019 five-year average. This is despite 2021 having the highest production costs since 2013.

USDA made widespread revisions to the last four quarters of market hog inventory estimates. Some of these didn’t net big changes in the total market hog inventory, some did. For example, USDA upped the March 2021 total market hog inventory by just 0.2%, but cut the 180-pounds-and-over category by 4.1% while boosting the 120- to 179-pound category by 4.1%. The June 2021 and September 2021 market hog inventories were trimmed 1.8% and 1.1%, respectively.

Feeder pig imports surged in 2021

Most of the U.S. hog imports are Canadian feeder pigs for finishing. This used to be a bigger business in the mid-2000s. Recent years’ numbers have been smaller but relatively stable. That changed last year. Limited feeder pig supplies and high prices in the United States encouraged higher shipments from Canada. Between January and November 2021, monthly shipments averaged 553,868 head, up 28.6% compared to the same period in 2020.

The weight mixture of Canadian pigs crossing the border also changed in 2021. Pigs weighing less than 15.4 pounds were up 7.0% through the first eleven months of 2021, compared to the same period in 2020. Pigs in this weight category make up about 60% of the total U.S. hog imports.

Imported hogs weighing between 15.4 pounds and 50.7 pounds were up 58.3% in 2021 compared to 2020. Imported hogs weighing 50.7 pounds to 110.2 pounds were up 51.1%. Imported hogs weighing 110.2 pounds or more for immediate slaughter surged 93.6%. A five-month labor strike at a large pork packing plant in Quebec was the salient factor that upped the number of Canadian market-ready barrows and gilts coming to the United States in 2021.

While the volume of Canadian hogs being imported into the United States remains relatively small, about 5% of total U.S. hog slaughter, recent dynamics have added more variability to that component of the hog production balance sheet. Furthermore, hog import data by weight group is published monthly, but there is a significant time lag in reporting — making accounting for these pigs in inventory estimates more difficult, especially when patterns are changing.

USDA dedicated to continual process improvement

Some may argue that revisions change nothing in terms of the future outlook. However, revisions do change our confidence in historical numbers and should also improve our confidence in future estimates.

Assumed biological and accounting constraints are static. But USDA continually discusses them as it tries to improve models. Large shocks can result in large initial errors in inventory estimates, requiring sizable revisions. Knowing causes, magnitudes and durations of shocks can improve precision going forward.

USDA uses diagnostics to make informed hog and pig inventory estimates. No single number or indication drives final estimates. The process is carefully balanced and controlled to incorporate a plethora of information.

Schulz is an Extension ag economist at Iowa State University.

TAGS: Livestock
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