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CME: Cooler-than-normal Weather a Big Help

by 5m Editor
17 August 2009, at 9:10am

US - Prices for cash hog prices declined sharply this week as producers are becoming increasingly anxious about the prospects of pork sales this fall, write Steve Meyer and Len Steiner.

The slowdown in hog slaughter in July did little to support the market. Rather, it had caused market hogs to back up and increased meat supplies in the pipeline. Hog slaughter last week was over 2.2 million head, the largest weekly slaughter for this time of year ever. In addition, hog weights are now trending higher, not lower as is seasonally the case this time of year.

Cooler than normal weather clearly has been a factor in producing heavier weights but we also think producers are behind in marketings and are trying hard to catch up (hence the 8.5 per cent drop in cash hog prices this week). As a result, the market had to contend this week with a 7.5 per cent increase in weekly pork production. Packers likely will have an incentive to maintain heavy slaughter schedules next week given the improvement in margins. While hog prices declined 8.5 per cent this week, the cutout dropped only 4.2 per cent, the difference going to pad packer margins and maintain demand for hogs going forward. Sow slaughter remains the hot topic of conversation and we have seen some reports that sow prices are down sharply , an indication that producers are getting serious about reducing production going forward.

USDA is reporting that sow prices are drifting lower but not as much as we have seen in private accounts. The price of 500/550 pound sows quoted by USDA in their Friday report (for day prior) was $38.46/cwt, almost $7/cwt lower than where they closed last Friday and now below year ago levels. According to USDA, their sow report captures less than 60 per cent of sows sold. Only large producers are required to report under the mandatory reporting requirements so it is likely that even lower price points were achieved but we do not have official confirmation of that.

The point, however, is that sow prices indicate that producers are starting to again reduce sow stocks. Lower grain prices and prospects of near record corn yields will likely slow down the liquidation but we also understand that banks have become much more anxious about the prospects for the US hog industry in 2010 and will have a say in the financing decisions that will be made this fall. In the meantime, the industry will have to bear down and go through the hogs that are currently on the ground and the potential losses implied by fall futures.