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Pork Commentary: Prices Surge on Fewer & Lighter Hogs!

by 5m Editor
15 February 2007, at 10:26am

CANADA - This weeks North American Pork Commentary from Jim Long.

It was an interesting week in the markets. Some observations:
  • The Iowa-Minnesota lean price closed last Friday at 65.50 (live weight 48.50 lb), up from the previous week’s Friday close of 62.39

  • Pork cut-outs exploded from 63.80 to 70.53 in the week. A gain of almost 7¢ per lb. A week ago, we suggested that cut-outs, which at the time were barely 1¢ per lb greater than the lean price, would have to widen, as packers were losing major money. We expected the cut-out to increase due to what we expected would be a seasonal decline in slaughter. It happened – packers’ spread on cut-outs is now 5¢ per lb and the best of all producers are getting more money for their hogs.

  • The US marketed 1.952 million hogs last week – the first time in 2007 below 2 million. The 1.952 was 4.7% lower than the previous week’s 2.045 million and 3.4% lower than the same week last year. Fewer hogs, higher cut-outs – higher hog prices. As long as we stay below 2 million a week, hog prices should be profitable for most hog producers.

  • Total US marketings for the year are 0.1% more than last year. Basically, no change. We continue to expect 2007 slaughter levels to be the same as 2006.

  • The Iowa-Minnesota weekly average weights are in decline
    • Most current week 267 lbs
    • Same week, last year 270.7 lbs
    • This year week before 269 lbs
    A 2 lb weight drop in one week with no summer heat is huge. 3.7 lbs lower the same week a year ago. Both numbers show that hogs are being pulled ahead. Higher feed costs are cutting pork tonnage. 3.7 lbs less weight per hog is around 7.5 million lbs live weight. We expect this trend to continue.

  • Another consideration is when we look at live weight differences year over year of 3.7 lbs, we believe this could reflect marketings being pulled ahead by up to 500,000 head. If this is correct, we could expect fewer hogs, year over year, in the coming weeks.

  • The average lean hog future close last Friday for 2007, February to December, was 70.94 (52.49¢ lb live weight). A reflection of the optimism for prices in 2007. We expect these prices are a good reflection of the supply-demand in the coming months.

  • US hog prices are currently running about 10¢ per lb lean higher than a year ago (2006 - 53¢ 2007 - 65¢) or about $20 per head, which should cover most of the feed price increase. In parts of Canada, the price has not increased. Quebec, for example, is the same as a year ago 126.04 per lean kilo or 40¢ US per lb live weight. With higher feed costs, this is not a scenario for profitability. We expect to see a decline in Canadian hog production in 2007 (primarily in Quebec and Ontario).

  • US cattle weights, like hogs, are also declining. Last week’s cattle average of 775 was 6 lbs below the previous week and 9 lbs below last year. Higher feed prices will not only cut meat production, it also will decrease feed consumption (cutting corn demand).

Packer Utilization

Last week, John Morrell in Sioux City, Iowa (a division of Smithfield Foods), announced the shut down of their second shift, which handled 7,000 per day. It should not be a surprise. US Packer capacity is 2.1 million hogs per week without Saturday. This past week, 1.952 million will be marketed with some Saturday activity. Live weights are dropping, weekly marketings are dropping. You can’t kill what’s not there. Packers have to have margins, or they go broke. Broke packers are not good for producers.

Morrell is reacting to the reality of supply. You can not afford to have workers standing around watching empty shackles going by and the raw material cost of keeping the line running will probably lead to paying too much for hogs. At the end of the day, Smithfield (Morrell) wants to make money packing, but they also need to have hog prices near 50¢ per lb. If you have one million sows and corn near $4.00 a bushel, it doesn’t take a rocket scientist to know the exposure the Smithfield Group would have with 40¢ lb hogs. If there is anyone that doesn’t want to jeopardize pork cut-outs and hog prices, its Smithfield. They are the biggest pig farmer.

Final Observations

Slaughter numbers and slaughter weights are declining. This is decreasing pork tonnage. We believe pork exports will remain strong, as long as the US dollar stays weak relative to most foreign currencies. Domestic pork demand is relatively static. Our read of sow slaughter data makes us believe that there is liquidation of the breeding herd in Canada-USA.

Lean hog futures are at relatively high levels historically. If feed prices were low, this would make us nervous, but at the current cost of production lean hog futures are not reflecting outlandish profit.

5m Editor