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CME: Pork Cutout Values Increase 11 Per Cent

by 5m Editor
20 July 2009, at 10:53am

US - Weekly average pork cutout values rose over $6/cwt or 11 per cent this week (see Figure 1) to provide some of the first good news that the meat and poultry business has seen in a while, according to CME's Daily Livestock Report for 17 July.

The increase was driven by a second VERY short week of FI hog slaughter. Last week’s short run was not much of a surprise since it shared the holiday impact with the week of 3 July. But this week’s run of only 1.954 million head was the smallest non-holiday weekly total since the week of 14 July 2007 when FI slaughter was 1.951 million head. The temporary closings of one Tyson plant and, reportedly, two John Morrell (Smithfield) plants last Monday was a contributor to this shortfall, of course. We had expected slaughter to fall relative to year-ago levels following the Fourth of July holiday but nothing like last week’s 8.7 per cent year-on-year decline. Pork packers have thus far taken this opportunity to get healed up a bit from the margin beating they have been suffering. Cash hog prices (based on the daily national afternoon purchased swine report — HG 203) began creeping up by about $0.50/cwt per day on Wednesday but made no large moves.

After dropping sharply before the holiday, hog weights have increased again the past two weeks (see Figure 2), suggesting that we may have backed up a few pigs with lower weekly slaughter runs. Last week’s average weight of 200 pounds were the heaviest on record for this week, breaking the record set in 2007 by 2 pounds. Barrow and gilt weights from USDA’s mandatory price reporting (MPR) system (report HG- 201) show the exact same pattern as the weight of all hogs in Figure 2. The average weight of MPR hogs (which includes only barrows and gilts from packers subject to mandatory reporting) last week was 199 lbs., 3 lbs. heavier than last year and 1 lb. higher than the previous record for MPR pigs, also set in 2007.

We have heard nothing of plant closures this week. Of course, the rise in cutout values reduces one of the incentives for shutdowns. It will be interesting to see how aggressively packers bid for hogs given this increase in cutout values. Historically, they have not been able to stand prosperity for long but this year’s profit pain may slow their "pig chasing" a bit.

The other quite interesting number in this week’s table is the quote for Omaha corn — $3.02 per bushel. And we found another source for an Omaha corn price that says $2.98 per bushel. We are not sure why the quotes are different but we know this: It is the first time since October 2007 that Omaha corn prices have flirted with the idea of beginning with a "2". Some extensive driving over the past few weeks (Iowa, Missouri, Kansas and Ohio) leaves us impressed with the condition of both the corn and soybean crops — but they are no doubt late. Both crops need heat units and central Iowa saw some near-record low temperatures Thursday night. Late development and cool weather mean that the date of the first frost will be very important.

All of this is good news/bad news for the pork industry. Good since it means lower losses but potentially bad since it also reduces the incentives to make the herd reductions needed to get back to profitability.