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Pork Commentary: Hogs and Pigs Report Bullish

by 5m Editor
4 October 2011, at 9:12am

US - In this week's Pork Commentary, Jim Long comments on the latest Hogs and Pigs report released by the USDA on 29 September.

Some of the wizard economists have called the last weeks USDA bearish, we don’t see that. This summer while we had US lean hogs around $1.00 the US breeding herd did not expand with the September breeding herd at 5.806 million, only 3,000 head greater than the 1 June. No expansion despite prices at historical highs. A breeding herd that is not expanding will not produce significantly more hogs over the next 10 months. Write $1.00 lean plus on the wall for next summer!

On the market hogs and pigs inventories we look at the inventory below 180 pounds. As most over 180 pounds on 1 September have already gone to market. The USDA reports that below 180 pounds 1 September was 49.917 million just a bit over 200,000 head higher than last year’s 49.682 million. That is less than ½ of 1 per cent difference year over year. The bottom line is the breeding herd and hog and pig numbers show little significant change. Going forward hog prices will be more affected by demand than supply variation. We are bullish, the USDA report is bullish. Demand is strong. How strong is pork demand? Last week despite marketing 2,250 million hogs US pork cut outs were 98.06 per pound, while the National 53 – 54 per cent lean hogs averaged $92.20 per pound. Both unprecedented high prices at market numbers that are 250,000 head a week more than we were selling weekly in the summer.

As we have been continually writing, hog prices in the major import markets of Japan, Mexico, South Korea, China and Japan are significantly higher than USA–Canada market prices. These price points will continue to pull pork to these markets. This pushes US hog prices higher. Throw in the high likelihood of less US beef in the coming year and US chicken supply that egg sets reflect 10 million fewer chickens per week year over year, it doesn’t take a rocket scientist that a growing US population will have to pay more for their meat ­­­­­­­­­­­­protein as total supply declines. The combination of supply and demand, we reiterate is bullish.

The Surest Cure for High Prices is High Prices

What a Eureka moment! Friday, the USDA discovered that $7.00 plus corn cut demand and increased supply. Friday’s USDA report indicated 164 million more bushels in storage than the experts’ guesses. By the end of the day corn had dropped 40 cents a bushel on the Chicago Board of Trade. On August 30, December corn was $7.75 a bushel with some ‘experts’ talking $12.00 per bushel. On September 30, a month later corn closed at $5.92 a bushel. That is almost a $2.00 per bushel decline. Also, on August 30, soy meal was $383 per ton while last Friday, September 30 it closed at $304 a ton. Almost $2.00 a bushel on corn and $80 a ton on soy meal translate into about a $25 per head decline in farrow to finish cost of production. That’s big money going in the right direction.

Margin Increase

The DTN Agdayta breakeven for 45 pound feeder pigs was $61.44 on Friday up $30.00 per head from a month ago. This is a reflection of the margin improvement in the industry mostly due to the big drop in feed prices. Unfortunately for feeder pig sellers the increase to $61.44 per head has not been reflected in the market place with the USDA weekly price calculation for 40 pound cash feeder pigs averaging $35.73. That is a huge difference. Over the years we have watched the small pig cash market and it usually follows the DTN Livestock Margin. Consequently, we expect a rapid increase in small pig prices in the coming weeks. 90 days from now we expect feeder pigs will be $80.

Summary

The September USDA Hogs and Pigs Report indicated a status quo for supply and when combined with strong pork demand domestically, and globally we expect this will lead to lean hog prices historically high for the next twelve months. We hope that the recent drop in corn and soybean prices continues, if it does, some fantastic hog margins will be captured in the next twelve months.