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Pork Commentary: Packers Able to Push Hog Prices Lower

by 5m Editor
15 May 2007, at 5:18pm

US - Last week US packers were able to decrease the price of lean hogs while increasing their margins.

Our rough calculation would indicate that packers figured out how to add $10.00 per head to their potential margins compared to the week before. Primarily by pushing prices to farmers down and farmers accepting the exchange. For the week, US packers handled 1.934 million head, which was down 36,000 from the previous week.

May 4 May 11
Iowa Minnesota Lean Price Average 73.68 69.96
USDA Pork Cut-Outs (Prior Day) 75.14 76.81
Packer Margin 1.46 6.85


We expect lean hog prices to rebound quickly. Packers are like us farmers; they cannot stand a good thing too long and will rapidly bid up hogs to the point of evaporating their margin. There is lots of packer capacity and competition. The real battle for them is retail space, food service and exports. If they do not have supply (or someone else bids it away) they can lose market share in one or all of their market areas. Bottom line: If a buyer wants pork you have to supply it or they get it form a competitor. In a competitive environment like the US packing industry, an unlikely scenario. Fantasy - Wal-Mart is your customer. They need 2,000 trailer loads of pork per week. You cut your kill. Do you want to be the guy to tell your higher ups “We cannot fill Wal-Mart’s needs.” How many milliseconds would it take a competitor to fill the void? Makes buying and selling the game of chicken that it is.

Grain Market

Last week, the corn market bounced around at 15¢ per bushel increments. Volatile is a good word for describing the action. The USDA on Thursday dropped US carry out with its supply demand projections. Despite this, corn still ended lower for the week.

What we wonder about is whether other countries increased production is being taken into consideration. High US grain prices are increasing potential returns for every grain producer in the world. Just as in the US, where over 10 million more corn acres will be planted in 2007 compared to 2006, the rest of the world is planting more grains that will go into feed stocks. In Canada, it is projected by Ag Canada that 2 million more acres will be planted into corn and feed barley than the previous year. Mexico projects 5 million more acres of corn. Russia, Ukraine, China, Brazil and Argentina? There is no way that there won’t be more.

Burning food (corn) for fuel is mostly a US phenomenon and there is little appetite for this aberration in the rest of the world. We believe that high world feed prices are decreasing global meat production and consequently world feed demand. World grain production increases will more than compensate for US corn ethanol increases this year.

Mexico

Mexican pork producers are currently having significant challenges. Corn has touched $6.00 per bushel. The average slaughter price was 13.26 pesos per kilogram last week (55¢ US liveweight lb). This price is under most producers’ cost of production. With little ag credit available, it is a tough scenario. The lucky ones bought their grain last harvest and have significantly lower costs. This because the Mexican harvest is earlier than the US and last year’s Mexican harvest was before prices jumped last fall. Mexican producers are also being whacked by circo-virus.

There are some new sow units being built in Mexico, but we believe liquidation is outstripping expansion. We expect per capita availability of Mexican-produced pork is declining. In the coming weeks, Mexican hog prices will increase as pork from the US becomes more expensive due to higher US pork cut-out values.

Don’t Look Now but Prices are Higher

  • Fed cattle prices are 22% higher than a year ago with production up 5%
  • Chicken prices are up 35% from a year ago with 1.5% less chickens
  • Turkey prices are up 10% with 0.2% more turkey
  • Lean hog prices are up 12% with 1.7% more pork
Demand is good with more total supply of meat and still stronger prices.

5m Editor