Everyone is hearing the call to reduce weights as an industry strategy to force the pass-through of higher costs up the chain. Every time the industry cycles through the oversupply phase, joint action is recommended to pull back supply.
This can be an effective strategy but the problem we face is that the industry has not consolidated to the point where joint action is likely to succeed. The reason is the benefit of cheating.
When there are hundreds or thousands of competitors in an industry, each seeks to optimize its output based on its own costs and price offerings without regard to the actions of others.
The problem with joint action in a competitive industry (one with many players) is that if everyone but me is induced to lower weights, the price will rise and I will benefit dramatically compared to others since I am still producing the same volume as before the joint action. The temptation to cheat thwarts joint action when there are enough players to make each one's action essentially anonymous.
There are two more problems which are thwarting supply reduction. First, most producers are doing the back of the envelope calculation for how heavy they can take pigs. If the final ration costs about 11 cents a lb and my marginal feed efficiency at 280 pounds is say 3.3, the rationale says I can continue adding that 280th pound as long as I receive $47.45 (live weight) for the hog since it covers at least the feed cost. The mistake then is made when they set the average load weight at 280.
This single pig optimization calculation overestimates the optimal load weight calculation when the marketing load has a variance (that is, they are not all 280 lbs on the truck). Based on a typical "on the truck-to-market" load variance, I estimate the optimal average load weight for a producer with the above costs to be between 255 and 260. So there is no question that producers using the single pig calculation are dramatically overestimating their cut off point for marketing weights.
The second problem has to do with packers getting backed up. I was talking to Steve Meyer a couple of days ago about this problem and he indicates that the unexpected surge in marketings this year has pushed packer capacity to the point that by late summer we could very well need all the packing capacity we have working six day weeks.
As we reach these limits, packers push back marketings and thwart the producer's ability to reduce weights. So even if you get the calculation right, you may have a lot of trouble getting average weights down to where they should be if the packer can't keep marketings current or pull them ahead.
Steve also mentions that sow killers (oligopolists) are limiting kills to avoid plunging prices for branded sausage offerings thereby limiting the pace at which the industry can downsize.
Lastly, we have probably not seen the complete realization of marketings yet from the expansion that took place over the last year (and is now largely curtailed). So the final wave of expansion is probably not quite fully realized at the slaughter plants. As these new sows move beyond their gilt litters to the more productive phase of their lives, the average parity structure of the industry will likely cause industry productivity to rise, which will negate the initial benefits of any increased culling (which is typically the low performing end of the sow herd anyway).
