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CME: Pork Packer Margins Down

10 April 2012, at 1:22pm

US - Our April 4 discussion about pig flows and the debate over whether pigs have been backed up due to low packer margins or pulled forward due to exceptional performance still rings true, write Steve Meyer and Len Steiner.

That debate is ongoing and still not completely resolved. But the numbers I included in that discussion were wrong. Spreadsheets are wonderful things are they not? They can also make an absolute fool of you and that is what befell me today when I realized that the historical data on which my slaughter forecasts were based were one year older than they were supposed to be. Duh. So, if you have been scratching your head and wondering just what Meyer was talking about, I apologize for the hair loss and time loss if any was, in fact, lost over the issue. Let’s consider the correct numbers, shall we?

The chart at below shows actual weekly slaughter for 2012 to-date (those data were correct in the original chart) and predicted weekly slaughter totals for 2012 based on the December and March quarterly Hogs and Pigs reports from USDA. It is clear that both predicted slaughter series are much closer to actual slaughter this year than was depicted in last week’s chart. In fact, about the only number that one can quibble with much is the December report’s slight over-estimation of hog numbers since January 1. And that 1.2% discrepancy between the predicted and actual numbers is hardly cause for alarm and could well be explained by excellent performance this winter. When data back to December 1 are considered, the December report was remarkably close, overestimating total slaughter for Dec-Feb by only 0.2%. And the March report has performed even better so far, missing actual slaughter from March 1 to April 7 by just 0.1% to the low side.

Using correct data, the argument for pulling some hogs forward is much more plausible. But the slaughter and weight data really suggest that hogs have moved to market at a relatively normal pace and have simply arrived at plants heavier due to exceptional performance this winter. If feed efficiencies are as good as growth rates, average costs for this winter’s hog supply are likely lower than normal, suggesting slightly higher profit margins. Now if I can ever trust my spreadsheets again!! My apologies for any confusion I may have caused.

And just how bad have pork packer margins been? As can be seen in the chart below, pork “meat margins“, the difference between the proceeds of selling the standard pork carcass and the cost of the animal, were RECORD LOW at -$14/head two weeks ago. They have rebounded a bit since then but remain near $10 in the red. Packers’ saving grace has been the value of by-products such as organ meats, head products, hair and blood. The per-head value of these very items has been over $20 for well over a year now and shows no sign of declining. As you might expect, these items are very dependent on ethic markets at home and exports markets. China and Mexico account for over 75% of U.S. variety meat exports in terms of both volume and value.