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Pork Commentary: USDA March 1 Report was Bullish

by 5m Editor
10 April 2012, at 6:58am

US - Last week we wrote, after the USDA March Hogs and Pig Report, that "we are still of the opinion $1.00 lean hogs will be reached this summer." It’s interesting how one’s view can be so much different than others, writes Jim Long.

John Harrington, DTN AgDayta livestock analyst, called the March Report "Bearish." Look for futures to respond in terms of bear spreading when trade resumes on Monday, with traders pressuring summer contracts...

As usual opinions vary but when the dust settled at the end of last week, June lean hog futures had jumped $3.50 a lb since the report was released ($7.50 per head). All other months had similar increases. Bottom Line: The report was not bearish. The market saw supply at a manageable level with the main driven being demand vis a vis Pork Domestic and Export Demand (latest date has exports at historically high levels) chicken supply (down), beef supply (down). Less total meat coupled with increased demand will always be more bullish then bearish.

Breeding Herd – Hog to Corn Ratio

The USDA March 1 Hogs and Pigs Report indicated 17,000 more breeding animals in the three months from December. A sign of true expansion, this in the face of corn prices at $6.50 a bushel. Hog to corn ratios in March was 10 to 1, with the exception of the disastrous months between January 2008 and January 2009, where the average ratio was below 10, this is the lowest calculation since the debacle of 1998.

What we are seeing is two solitudes. One solitude; is those who grow corn and feed their pig’s $6.50 corn,$0.90 lean hogs, and increasing land value works for cash flow and the balance sheet despite the 10 to 1 corn ration. The second solitude; those who buy corn, raise hogs and own little land, (More than half of US production). A 10 to 1 hog to corn ratio doesn’t work for this group. Cash flow and balance sheets are not going in the right direction with a 10 to 1.

Historically a hog to corn ratio below 15 to 1, would usually lead to breeding herd liquidation. The numbers are different now especially when growers of corn have huge margin over cost of production. Not sure what this truly all means. We expect in some way, over the next few months, higher hog prices will improve the hog to corn ratio and will support the margins of hog producers who buy corn.

Corn

Next couple of weeks will be interesting. It appears that early spring and subsequent higher ground temperatures have most every corn farmer ready to unleash their corn planters. If we have rapid plantings this could pressure corn lower. The earlier corn is planted, the higher likelihood of more acres and higher yields. We all are survivors in the commodity business. We all know prices go up and down. Corn prices will fall, it’s inevitable. When? As it’s said, "is the billion dollar question."

Chickens

US egg sets and chick placements are running 5% lower than a year ago. Around 10 million less chickens a week. Less chickens supports hog prices.

Cattle

US cattle marketing year to date are 4.8 per cent lower than last year (-430,000). This lower trend is expected to continue for the balance of 2012. Less beef is bullish for hogs.

Seasonality

In the coming weeks, the seasonal drop in hog numbers will be upon us. Packers will continue to chase hogs to keep their lines full, maintain market share and shelf space while filling good margin export orders. Volatility will continue, not only the swine market but grains will probably swing like a teeter totter. Close your eyes keep driving and pray for rain.