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CME: Lean Hog Futures Rally on Smaller Slaughter Numbers

by 5m Editor
20 June 2012, at 9:13am

US - Lean hog futures have rallied in the last 30 days on smaller slaughter numbers, lower hog weights and improvements in short term demand, write Steve Meyer and Len Steiner.

Below are some of our observations:

Slaughter: We run a daily rolling average of the slaughter for the past seven days, basically an indication of weekly slaughter at any point in time. As the top chart shows, hog slaughter for much of may was running higher than both last year and 2010. During the period 5 May - 25 May, hog slaughter was running as much as 5 per cent higher than a year ago. This was about 2 percentage points higher than what the 1 March inventory survey indicated. One has to see the slaughter during this period in the cotext of hog and pork prices during April. The collapse in cattle futures and the effects of LFTB caused end users to pull back and reduce purchases. Producers felt compelled to accelerate marketings even though this meant some short term pain, evidenced in hog prices at $76 on 10 May. The acceleration in marketings did have the effect of making producers more current. Post memorial day slaughter has dipped below 2 million head per week, about 1 per cent lower than a year ago.

Weights: In addition to seeing fewer hogs come to market so far in June, market also has had to contend with the seasonal decline in hog carcass weights. At this point, hog weights have followed a very similar pattern to last year. If anything, this year the difference from peak to trough will be even bigger than it was a year ago. Consider that in early April, hog weights were establishing all time record highs, with carcass weights over $210.lb. By early May, weights continued to persist at 208-209 pounds per carcass, about 1 per cent higher than a year ago. The latest data from the mandatory price reporting system last pegged hog weights at 203.6 pounds. The seven day rolling average now stands at 204.5 pounds per carcass. Hog weights are still running about 0.6 per cent higher than a year ago but the 4 pound seasonal reduction combined with the lower slaughter numbers effectively has removed about 37 million pounds of pork (-8.5 per cent) since mid May (slaughter from 2.1 million to 1.96 million, weights from 209 lbs to 205 lbs).

Demand: Clearly it is difficult to make good short run demand estimates given the limited information available. However, there is some evidence to suggest that retailers were able/willing to boo pork for post-Memoridal day needs. Bellies in the 85 cent range and 72CL trimmings (sausage materials) as low as 55 cents clearly presented an opportunity. The problem is that that there is a lag effect in demand. You don't see those May buys until June rolls around. What appears to have happened is that end users looking to buy spot loads are finding out much of the product is already spoken for. The reduction in supply has further exacerbated the situation, limiting spot purchases. End users that held off on forward buys and wanted to stay on the market are now have to fish in a much smaller pond. Last year, the post Memorial Day rally ended in mid-June. Futures are now trying to guess if were are ready for a repeat performance.