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Hog Market Thoughts for April 15th, 2006

by 5m Editor
24 April 2006, at 12:00am

By Al Prosch, Nebraska University Pork Central Coordinator - Pork producers can still be profitable for a marketing year that extends through April of 2007. But, it is getting harder to do and the margin is becoming very small.

Al Prosch
Al Prosch

Using the Chicago Mercantile Exchange (CME) to price corn and soybean meal, for producers with a $40.00 per cwt. live value breakeven, when using a -$2.00 basis, the margin for profit for this period is estimated at $1.25 per cwt. While basis for the Western Cornbelt Hog price averages -$2.00, the lowest that basis has been is -$13.17i.

April Lean Hog futures contracts led the downtrend for the past month (April chart). After breaking below the contract low set last June, this contract has attempted to hold above the downtrend that started about March 1st. April closed trading steady and that may help the contracts that are farther out in time maintain a slight rally as evidenced by the June contract ($64.80).

June is trading at about a $10.00 premium to current cash prices. June has not challenged the lows set last June in the manner of the April contract (June chart). Also, while June has been trading on a downtrend similar to April’s since the 1st of March, it has more often traded near the middle to upper side of that trend. The gap in the June upturn, circled on the chart, may be filled, cutting short the upward movement.

May Lean Hog futures at $63.40 are also trading at nearly a ten dollar premium to cash. In a typical year (the average shown is for ‘02-‘05), between the 16th week and the 21st week, the National Net carcass price will rise about $8.00. This would suggest that the expected rise in cash hogs is already bid into May and June futures.

Supply and domestic demand seem to be set in the market. With ample supplies of meat of all kinds, it will take real positive news to push live hog prices up more than expected. Pork exports still remain the bright spot. Pork exports for the 1st two months of 2006 were 21% higher than the same period in 2005. And, 2005 posted a 22% increase over 2004. Pork may have been substituted for some poultry exports. Mexico took 44% more pork, Russia 221% more pork, Hong Kong 277% more pork and Taiwan 97% more pork, last month.

At some point, increased poultry supplies will have an impact on pork. The question remains, will we have an Avian flu outbreak, and will Americans reduce their consumption of poultry products as a result? If US consumption of poultry is reduced, pork may benefit as the substitution of choice. If there is no outbreak or even with one where consumption of poultry is unaffected, the total supply of meat products will put downward pressure on prices.

The feed issue remains an important item to watch. From 2005, corn is up almost 20% for the week ending April 8th. Soybean meal is down slightly. Overall feed costs are up. While not a serious issue, at this point, any poor crop conditions could put corn prices up significantly. Meal prices could rise, especially if, despite the large planting acreage intentions, weather related issues suggest lower yields.

If the planted acres are significantly different from the planting intentions report, and more acres are planted to corn, corn prices may not be as high. But, weather / yield issues will remain and with the added demand from ethanol production, it may be hard to find corn cheaper than we have right now

Source: University of Nebraska's Pork Central - April 2006