The talk of 2016 was heavy hog supplies relative to available processing capacity. While this was the main theme, the subplots are what the markets continued to adjust to in the search of the right price. At the beginning of the year it was no secret that 2016 would see record large pork production but demand, speculative and realized, may have been the great equalizer.

Resurgent pork demand from China and Hong Kong in the early parts of 2016 helped support hog prices. The thought was if demand was strong enough, such large production could be absorbed. By mid-year prices were eroding and the market was pricing sharp discounts for year end. Pork trade to China and Hong Kong were higher year to date and helping with the overall trade picture, but increased trade wasn’t improving fast enough.

Then came the late-year rally in hog prices. Producers aggressively marketed hogs. The market stayed current. The pork cutout outperformed year-earlier levels despite notably more pork available. Retail features and foodservice offerings were plentiful and robust export volumes helped clean up the market.

Survey shows record large supply of hogs will continue in 2017
Views of 2017 have begun to come into focus although the eventual supply/demand balance will have a strong influence on final outcomes. Last year can be a testament to that. The recently released USDA December Hogs and Pigs Report confirmed that hog inventories are record high. Because the numbers were higher than the pre-report estimates, the market will adjust accordingly. This is the near-term adjustment part of the market finding the right price. Just as important, however, are the longer term prospects that will help shape the future.

As of Dec. 1, 2016 the U.S. breeding inventory, at 6.090 million head, was up 1.5% from last year, and up 1.2% from the previous quarter. This is the largest December breeding herd since 2007 and the largest quarterly breeding herd since June 1, 2008.

Hog producers have been investing in equipment and facilities
U.S. hog producers have been expanding the size of the breeding herd in recent years given strong profits. Accompanying the herd expansion have been investments in equipment and facilities. Even in a lower price environment it is a difficult decision to leave a sow barn empty or even at reduced capacity. As long as variable costs are covered and there is income remaining to cover some of the fixed costs, production is more profitable than letting the facilities sit idle.

As hog slaughter ratcheted up in 2016, cull sow prices plummeted. Nationally sow prices for the week ending December 17, 2016 averaged $26.56 cwt. That was down $28.01 per cwt from the last week of August. Because of these lower salvage values and inexpensive and plentiful feed, producers are not desperate to get sows off the farm. In fact, the ratio of sow slaughter to sows that have farrowed suggests that producers have been holding their sows for a longer period, given the excellent profits available the last few years.

Anticipated profits are an incentive to maintain breeding herd
Anticipated profits are also an incentive to maintain the breeding herd at the current level. Futures are offering a small, but positive, margin for 2017. Possibly bridging the gap to when the cyclical price pendulum swings back. Producers who are in the market will be in a good position to quickly seize windows of opportunity that may open up in the months and years ahead.

The big expanders according to the USDA Hogs & Pigs survey were in the states of Illinois and Missouri. Combined, those two states added 90,000 head to the breeding herd from December 1, 2015 to December 1, 2016. Take them out of the mix and the rest of the U.S. states, collectively, operated about even.

Hog producers have been making great strides in productivity
Even with a fairly stable breeding herd the U.S. hog inventory will continue to grow as hog producers have been making great strides in productivity metrics. The average pigs saved per litter was a record high at 10.63 for the 2016 September-November period.

Productivity gains accelerated from 2006 to 2012, then declined by an annual average of 2.9% in 2014 due to porcine epidemic diarrhea virus. The following year, pork producers gained back 4.6% and added another 1.1% improvement in 2016. Continual improvement in genetics and management practices, less any disease disruptions, will be the backbone of incremental advancements in the years to come.

Significant increases made in number of pigs saved per litter
The influence of larger operations, those with inventories of 5,000 or more hogs and pigs, on litter rates has increased greatly, even over the last several years. In September-November of 2008, the average number of pigs saved per litter on operations with less than 5,000 head was 8.48 pigs. The average number saved per litter on all operations was 9.50 pigs and the average on operations with 5,000 or more head was 9.60 pigs. By September-November of 2016, operations with 5,000 or more head saved 10.70 pigs per litter while the national average for all operations was 10.63 and the average for operations with less than 5,000 head was 9.30 pigs per litter.

There will be an increase in pork production for the first half of 2017 based on hogs already in the pipeline. For the second half of 2017 an increase is anticipated over the record levels just posted in 2016. However, there is a new, welcomed, factor in play that the market only talked about in 2016. Additional packing plants coming on line in 2017 and 2018 will help ease capacity constraints.

Additional packing plant capacity is good news for producers
The additional capacity is good news for producers as more competition for their hogs will give them a bit more leverage. Packers will want to hold market share, and to do that, they will need to bid to get the hog supply.

Packing plants desire to operate at a level which the number of animals equals the operating capacity of the facility. Slaughter levels that greatly push packing plant utilization above a normal capacity level force plants to offer significantly lower prices for hogs. Plants must pay overtime wages, cold storage becomes full, and the price of pork has to be lowered to stimulate more pork consumption.

On the flip side, when packing plants are underutilized, they incur higher fixed costs per unit. Also, these businesses have pork contracts to fulfill and no packer wishes to give up shelf space, food service or export markets. The result is there is an incentive to pay a higher price for hogs to secure a quantity level that will not cause the utilization level to drop further.

Key to future: will packers be able to increase sales of pork?
With more than 2.5 million hogs moving through U.S. plants several times this last fall, packer capacity has been pushed. Plus, total pork packer gross margins (cutout plus byproduct minus hog carcass) have been extraordinary, only rivaled by the pork packer gross margins of 2014. No wonder new packing plants are under construction and the industry is in an all-hands-on-deck mode to get operational as soon as possible. The key going forward is whether packers will be able to grow sales of pork, particularly to key export markets.

Most of the factors that could diminish market conditions at this point, accepting the historically high pork supplies, relate to the demand side. Domestic per capita pork consumption is forecast to rise moderately in the years ahead, as production gains will be large enough to support rising domestic use. Per capita consumption in the U.S. may not reclaim what it was decades ago but the industry will continue to grow.

Rather than only jockeying for more U.S. market share, the industry will also be continuing to look outside the U.S. for profitable growth. Approximately 26% of U.S. pork and variety meat production is now exported, but that is likely to grow.

Schulz is the Iowa State University Extension livestock economist.