CME: When Will Someone Blink?

by 5m Editor
6 August 2009, at 9:43am

US - Profit prospects for pork producers have taken a sharp turn for the worse in the past week as projected feed costs have risen and CME Lean Hogs futures have hit new contract life lows, write Steve Meyer and Len Steiner.

The graph below is a familiar one to DLR readers but it looks more negative than perhaps ever as of yesterday’s futures market close. Note that we have extended the graph to cover all of 2010 since we now have futures contracts on the board for all of those months.

Since 27 July, projected costs have increased by $5-$6/cwt carcass as corn and soybean meal futures have rebounded. Projected breakevens had gotten near $62, on average, through July 2010 in July.

The sell-off in LH futures have pushed projected cash prices for this fall BELOW $50/CWT ON A CARCASS WEIGHT BASIS. That equates to live weight prices below $37.50/cwt, levels not seen since the cycle lows of 2002 — when breakeven costs were in the mid-$50s on a carcass weight basis.

As of today, the only month that can be projected to be profitable between now and the end of 2010 is July and the projected profit is $0.76/cwt carcass or about $1.50 per head.

The question from many is "When will someone blink?" Sow slaughter through the week of 17 July was still running substantially below last year’s runs. Total sow slaughter was 11 per cent lower than in 2008 that week but deducting higher imports of Canadian sows shows that slaughter of US sows was actually 20 per cent lower than last year. Gilt slaughter data from the University of Missouri does indicate that the percentage of total slaughter accounted for by gilts remains high, averaging 50 per cent since 1 May. That is 0.5 per cent higher than the average for that time period over the past 10 years. A gilt percentage of 49.2 to 49.4 is about equilibrium so the sow herd is being reduced by lower gilt retention. The pace, however, is slow due to lower sow shipments.

Why such delay? One answer is structure. In 1997, producers selling 6000 or fewer hogs per year accounted for about 40 per cent of total marketings. Using 2008 USDA inventory data and assuming 2 marketings for each 1 animal in inventory, that number is now near 20 per cent. The remainder of the hogs — 80 per cent as of 2008 -- are in the hands of larger producers and involve large investments in fixed assets and a substantially more important part of the farm enterprise mix. For many the hog operations is the ENTIRE farm enterprise mix and, quite understandably, one they will not give up without a fight.

And this challenge in the pork sector has wide fallout. We received a recent e-mail from a friend in the cattle business chiding the pork industry with "If those guys could ever rally a bit, it may give cattle prices a chance." Indeed, pressure from lower hog prices is weighing on other species as well. Something has to eventually give, right?