Hog Market Thoughts for September 1

By Al Prosch, Nebraska University Pork Central Coordinator - Total meat supplies are plentiful and that’s affecting pork prices.
calendar icon 11 September 2006
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Al Prosch
Al Prosch

But, with the export market using a greater increase in volume than the increases in pork production have provided, this year the domestic pork meat supply is somewhat lower. With plenty of meat choices, domestic demand is lower and prices remain similar to last year. The pork cutout prices for 2004 though 2006 may best illustrate this (Figure 1).

2004 started out very close to the average for 1998 through 2003. However, that changed quickly, partially due to the popular diets of the time, and 2004 prices were very strong. 2005 began very strong and seemed to end up moving down again partially due to the waning strength of some diets. 2006 began as one might have expected, then we saw prices move back up in late spring and summer. This price movement, from the beginning of June (week 23) to the beginning of August (week 28), occurred about the same time as hog slaughter numbers dropped to 2005 levels or lower (Figure 2).

Cold storage stocks are up, compared to 2005, for all meat. Beef stocks are over 20% higher with the big increase being in boneless beef. Pork stocks however are lower by about 10%. Lower stocks put ham primal composite values $6/cwt higher than one year ago. Lower stocks of bellies, loins and trimmings should also be supportive of prices into the fall.

August is frequently the annual low for pork cold storage stocks, which normally begin to increase as hog slaughter runs increase into the fall. Figure 2 shows 2006 slaughter beginning to seasonally increase, but in line with 2004-2005. Indications are that slaughter will continue very close to the numbers slaughtered in 2005.

On August 30, 2005 the December 2005 lean hog contract closed at $61.00 (Figure 3). From that point, the contract increased through September and then dropped in value during the first two weeks of October. Its lowest point in mid-October was about $59.50. It recovered into November (Figure 4) and closed in December at $62.75.

Hog supplies are expected to increase this fall and be slightly higher than 2005. Export demand has consistently used the increase in hog slaughter and more. If export demand remains well above 2005 in the last four months of 2006, it would be reasonable to expect hog carcass prices to meet or exceed 2005. On comparable dates, August 30, 2005 and August 29, 2006 the December lean hog contract prices were $61.00 and $63.42 respectively.

If December 2006 lean hog contract follows the same seasonal pattern and keeping the same $2.43 price spread shown between 2005 and 2006, we could see a mid-October price of $62.92 for the December lean hog contract. Carrying this reasoning out to the end of the December contract would predict a close in December of $65.27. It would also suggest a high coming up at the end of September of around $67.92. Watching the performance of the December contract over the next week to ten days will give a better idea of whether the December contract will perform as suggested.

We have the first rumblings of changes in the export situation as reported by Pork Magazine “Word is pork's slowed growth is due to meat distributors cutting back in anticipation of higher U.S. beef imports that they believe will weaken pork demand.”1 Exports will drive the fall markets. If they remain well above 2005, prices should very good. If the export pictures sours, it will affect the psychology of the hog market and prices could well move more than supply and demand would indicate.

Pork producers with a live weight breakeven price near $40/ cwt. would see a profit through the August 2007 futures contract. However, depending on basis, there would be a drop below profitability in October of 2007. Producers who manage feed costs can look to 2007 with some optimism.

As fall harvest approaches, producers with storage will want to fill that storage. Then, perhaps as long as prices are relatively low, perhaps $2.20-$2.35 Nebraska cash price, they would be better off buying corn hand to mouth and keeping the lower price stored corn as a hedge against a sharp rise next year. Both the impact of new ethanol plants demanding corn, and any weather problems could make 2007 corn prices very volatile. Also, soybean meal prices are at attractive prices and should offer a pricing opportunity through harvest (Figure 6).

September 2006

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