The Market's Fine Print

Wed. Mar 25, 2015 5:40 PM

By John Harrington
DTN Livestock Analyst

Not unlike the pre-race energy surrounding a major NASCAR event, the last few trading sessions before the release of the March 1 hogs and pigs report are brimming full of excitement, nervousness and anticipation. While some pit crews spin tires of fret about being under-hedged, other long and short mechanics and drivers argue whether more profit-taking before the green flag drops could actually help handle the curves.

The grandstands are overflowing with eager market watchers, eyes glued on USDA enumerators in lockdown. When Washington's pace car finally pulls on the reporting track, a momentary hush extinguishes the din as the undersecretary bellows the long-awaited cry:

"Gentlemen, start your erasures!"

Maybe it's "hit the delete key," "drag file to trash," or "reinitialize your hard drive?" Truthfully, it's been some time since I've donned a crash helmet and matching fire suit.

Yet I'm painfully familiar with the smell of burning rubber, that acrid smoke so often billowing from revised government data. More specifically, in all the years I've been chasing hog numbers, quarterly inventories and revisions seem to go hand in hand as much as speed and danger.

So buckle your seat belt and check the roll bar. Unless I'm sadly mistaken, the new swine census set for release at the end of the week will be chock-full of "oopsies," "but-I-meants" and "on-second-thoughts." The resulting makeover could leave Lady Gaga looking like an Amish bride.

It might be enough to cite the extremely volatile history of the H&P data series. Throughout much of the 1980s and 1990s, it was a fairly safe bet that the unveiling of any given quarterly assessment would trigger multiple limit-moves in hog futures, one way or the other. Whether the predicable surprise package consisted of goofy new estimates, radical revisions, or both, the post-report market was guaranteed a wild, reactive ride.

Indeed, it wasn't that long ago concerned risk managers within the pork industry seriously lobbied the USDA to move from quarterly data collection to monthly, arguing that at least the tighter timeframe would produce smaller supply shocks and sponsor milder price swings.

Even though the bloodless budgeting of sequestration remained far on the horizon, Washington's penny-pinching bureaucrats could never find the money to more frequently count snouts. Who knows? Maybe the powers that be simply reasoned that four rounds of embarrassment were more tolerable than a full dozen.

To be fair, the USDA's track record over the last decade has generally improved, necessitating fewer and less drastic corrections from one set of numbers to the next. I don't think refined methodology or better math skills deserve the credit more than the bittersweet and persistent march of consolidation. It may be simply easier to proctor fewer large operators than keep accurate tabs on a flurry of smaller ones.

But my prediction that the pending March 1 H&P report will be rife with revisions is based on more than bad vibes I may have with the government's past performance. More concretely, the current state of bookkeeping that pretends to balance current assumptions about herd size against actual slaughter brings to mind the creative accounting of Bernie Madoff himself.

Consider just two examples, one significant in size and another much, much larger.

According to the Dec. 1 inventory, the summer pig crop of 2014 was no larger than 29.53 million head, 1.1% smaller than the previous year. Although this group was staged to essentially fund the Dec-Feb slaughter of market hogs, the winter's actual kill of barrows and gilts totaled 27.89 million, a short 1% greater than the prior year. It would appear that last summer's pig-pull was understated and ripe for an upward adjustment.

At the same time, last fall's pig crop was measured to total 29.37 million head, 4% greater than 2013. If this assessment was accurate, how do you explain weekly slaughter this month averaging 8%-10% larger than last year? I suppose some of the unexpected increase could be credited to aggressive marketing by pork producers through the first quarter of 2015 (weights have been falling somewhat more than the seasonal average). Nevertheless, the canyon seems too wide to span without revisiting the fall pig estimate.

In a broader sense, a prolonged period of supply anomalies in the wake of 2014 (i.e., the bizarre and devastating year of PED) probably makes sense. We might be set for a year's worth of significant revisions. Personally, I plan to trust those new farrowing intentions waiting in the wings about as much my chance to win at Daytona.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

(AG)

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