CME: Hog Price Series Post Significant Gains

by 5m Editor
21 April 2011, at 9:10am

US - Hog prices have commenced their annual rally the past three weeks with all of the major price series posting significant gains, write Steve Meyer and Len Steiner.

Two of those prices are shown in the charts below. The national weighted average net price for negotiated purchases is, in essence, the “spot market“ price received by producers and paid by packers. It is the price of animals that are not sold under any sort of marketing agreement and it includes premiums/discounts for carcass quality — thus the “net“ price designation as opposed to being a “base“ price. As you can see, the rally for the net negotiated price has been very impressive, carrying it to a new records each of the past 2 weeks. The rally has nearly kept pace with last year’s spring rally and, should it continue at the ‘10 pace, into May, it would take “spot“ hog values to about $105, even higher than today’s May close.

The national weighted average net price across all purchasing methods has rallied as well but, as should be expected, that rally has been much less explosive since this price series includes hogs sold/purchased through formula contracts, contracts tied to CME futures prices (which could have been executed as much as a year ago— and thus be assigning lower values to hogs moving to slaughter right now!) and other agreements with prices tied to feed costs, costs of production, etc.. This year’s rally of the total net price has been a bit slower than that of 2010 but should it match last year’s rise in magnitude even this average price would get close to $100.

We have documented the fact that both domestic and export demands for pork have been strong but this most recent rally is being driven by a very predictable occurrence — lower hog supplies. As can be seen in the following chart, weekly slaughter fell by over 100,000 head over the past two weeks. You can see that the same decline happened last year BUT — that drop included the short slaughter week of Easter in the first week of April 2010. Obviously that short slaughter week this year should be this week — and we are already sharply lower on hog slaughter.

The bottom chart at right shows the average carcass weight of the barrows and gilts whose prices and carcass data are reported to USDA as part of the mandatory price reporting system. Lower MPR barrow and gilt weights support the idea of tightening supplies as producers must dig a little deeper into their finishing buildings to deliver hogs against these higher spot bids. That is not to say we are finding many (or any!) “light“ hogs since the average is all the way down to a still-whopping 207 pounds. But it does suggest that producers are pretty current and are getting more so each week.