22 June 2022

4 minute read

By: Jim Long

We have to admit we are confused by the hog market. Cash hogs Iowa-Minnesota last Friday averaged $121.17 per lb. A reflection of what packers will pay for hogs not on contract. For lack of a better way to sum it, the National Average Lean Hog, made up of mostly contract hogs, was $1.08 lb. A big difference.

Other Observations

U.S. Pork Cut-outs closed Friday at $114.61 lb., a big jump. In the past week, almost 10¢ lb. We were with a packer last week that called the market “inverted.” They were paying in the $1.20 lb. range for Cash Hogs and Pork Cut-outs that day were $1.08. Don’t need a calculator to know that they were losing money on each cash hog they bought. This story for us is packers are still ready to pay up to get hogs in order to keep employees busy and meet sales order requirements. Hogs are short.

In the past few years having a packer contract based on percentage of the Pork Cut-out was considered excellent if it was in the 90%+ range. The last while, this formula has lagged, i.e., Pork Cut-outs mid-last week $1.08 lb. x 92% = 99¢ lb. Cash Hogs were $1.20 lb. $40 per head difference. Now Cut-outs Friday at $114.61 lb. x 92% = $1.05 lb., still below most of other market formulas. Our observation; Cut-out contracts recently have helped packers keep average cost of daily kills lower.

July Lean Hog Futures have ranged in the last three months from a high of 126.150 to a low of 97.375. A range of over $60 per head. They closed Friday at $1.11 lb. in the middle of the range. We find it hard to fathom any fundamental reason there should be such volatile gyrations. We think increasingly that Lean Hog Futures driven by hedge funds and algorithms is disconnected from the commercial hog market. When Lean Hog Futures were diving in May, the hog price held steady. We are wondering if the lean hog futures connection to the real hog market has about the same connection as show pigs to the commercial production industry. Answer of latter – not much, if any.

Most of the world’s hog production doesn’t have access to Lean Hog Futures. We aren’t sure if we are better off with the way it seems to be driven today by players with no plan or intention to produce or own pigs. As my late friend Doug Maus called Chicago, “Las Vegas with no rules.” On the flip side, lots of people like in Las Vegas, think they can beat the house.

Before and after the World Pork Expo my son Spencer and I did some traveling. In the course of our trip, we went through Michigan, Indiana, Iowa, Missouri, Kansas, Nebraska, South Dakota, Minnesota, and Wisconsin. We saw lots of corn-soybean fields. Observation: crop is in, looks good, moisture almost everywhere with heat. Current crop with moisture-heat is in good shape so far. Our industry is getting crushed with high feed costs. A big crop could certainly be helpful.

Prices last Friday

• Beef Cut-outs Choice $2.66 lb.
• Pork Cut-outs $1.14 lb.

Beef Cut-outs 2.3x higher than pork cut-outs. Why? Consumers will pay more for beef, obviously. It has demand. Consumers (our customers) prefer the taste of the red meat from beef, obviously. If we could move to half at $1.33 lb. it would add $40 to a carcass.

Our position has been for many years that the push to produce “The Other White Meat” was a terrible marketing plan. Beef always sold for more money and it’s red. We mistakenly as an industry chased the cheaper chicken (white meat). We then made pork too lean destroying the taste experience and once where loins and hams (half the carcass) led cut-out values they now languish, a true sign of consumers’ sentiments on these products. Also, in the quest to produce ever leaner hogs we all can see the increase and record sow mortality and wean to finish mortality as ever leaner low appetite pigs lose their robustness.

Ribs, Belly, and Butt all have marbling and taste. Consumers are voting with their money what they want. Loins and Hams are obviously not meeting consumer wants and languish in price (50% of carcass). If we could produce loins and hams that could get the price of Butts, an increase of 40¢ lb. x 100 lbs. of a carcass = $40 per head increase in carcass value. Real Money. To us, it makes sense to start with consumer demand, and its obvious they will pay more for a better eating experience (ribs, bellies, butts). To us, as an industry, we should be producing what the consumer is looking for. It’s what all good marketing companies do. Produce to demand.

Summary

The U.S. Hog Price and Pork Cut-outs showing further strength. U.S. hogs are trading over $1.20 lb. We expect the sow liquidation in Europe and China will lead to the three major pork-producing blocks in the world having less production in the coming months. This will lead to higher hog prices than future markets indicate.