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CME: November Pork Demand Markedly Lower

by 5m Editor
18 December 2009, at 5:29am

US - Steve Meyer and Len Steiner write, "In response to comments from readers, we offer two items of additional information on topics discussed earlier this week."

  • Ethanol production profits have dropped sharply since the week of 4 December, the last data depicted in the chart from Iowa State University’s Center for Agricultural and Rural Development (CARD). We certainly don’t mean that as any criticism of CARD. It is just a point of clarification. Two private sources provided estimates that show margins were 20 per cent or so lower last week as corn and natural gas prices increased and ethanol prices fell. That margin deterioration is exactly what we expected to happen — though not quite that quickly — since economic profits encourage higher output that will drive up corn prices and drive down ethanol prices. Or, economic profits could disappear due to exogenous shocks such as falling oil prices. In a business with excess capacity, it is very difficult if not impossible to keep profits higher than would occur at a “normal” return on assets.

  • Canada’s Hog Farm Transition programmeme involves more than just sows. It also pays producers to remove weaned pigs up to 30 kg (66 lbs.) and hogs from 31 kg (68 lbs) to market weight. We have addressed only the sows being removed because we think those numbers are far more important to the long-term price and profit picture for both the Canadian and US pork sectors. In addition, the sow numbers are far more significant. Consider that in each of the first two tenders, roughly 2 weaned pigs and 3 market hogs have been accepted for each sow accepted. For comparison, each of those sows, on average, produced from 9 to 11 pigs in her most recent litter. It certainly appears that the participation has primarily been from sow farms and that the impact has been much larger there. That’s the reason for our addressing the sow removals and not the shorter-term pig removals. It should be noted that all of these hogs are moving through commercial slaughter. Canadian sources have told us that they are trying to move the product from these animals into export markets or markets where current sales will not be displaced but there is, to our knowledge, no information available from which to judge the success of those efforts.

USDA’s monthly retail price estimates for November indicated higher beef prices, roughly steady broiler prices, lower pork prices and, as expected, sharply lower turkey prices versus their respective levels in October. The monthly data for 2000 through present appears below. Note that this chart includes both the All-Fresh Beef price series (which includes Choice, Select and store-grade product) that we usually include and the Choice Beef price series. The addition is to draw attention to the sharp increase in Choice prices (+3.7 per cent) this past month. We would like to say the increase is indicative of better foodservice business. While that sector is improving, we doubt seriously that it is doing so at a rate high enough to drive Choice beef nearly 4 per cent higher in one month. The better explanation, we think, goes back to some press items a couple of months back that reported retail consumers were discovering that higher-quality steaks were a relative bargain. And indeed they were — and still are in many cases. Such a shift in behavior should drive Choice prices higher and the data say it actually happened.

Pork prices were 2.2 per cent lower than in October and 6.2 per cent lower than one year ago. The average price of $2.816 per retail pound was the lowest since early 2007. The declines occurred, however, while production and domestic pork consumption were falling relative to last year. Based on weekly data, November pork production was 1.3 per cent lower than one year ago. Assuming November 2009 exports equal to one year ago and 30 November frozen inventories roughly equal to those at the end of October, domestic pork consumption in November was 1.4 per cent lower than last year. Add in populations growth and per capita pork consumption was more than 2 per cent lower than last year. Lower consumption and prices mean that November pork demand was markedly lower — unless November exports were MUCH, MUCH larger.

Further Reading

- You can go to pages 2-6 for information about CME Group’s new Calendar Spread Options for Live Cattle and Lean Hogs by clicking here.