Pork Central Hog Market Thoughts for February 1st 2006

By Al Prosch, Nebraska University Pork Central Coordinator - In the middle of January (January 15th Market Thoughts), lean hog futures contracts through February of 2007 offered a producer with a $40.00 breakeven and an average basis of -$2.00. That’s an average profit for the marketing year of $11.47 per market hog at 270# live weight.
calendar icon 13 February 2006
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Al Prosch
Al Prosch

On January 30th, that value was down to $7.77 using the 10:30AM market data. It is encouraging to see the summer months seemingly holding their ground and the fall / winter contracts gaining back some of their lost ground. This is certainly a time to watch the recovery and look for pricing opportunities.

Meyers and Steiner, in the January 25th Daily Livestock Report, have an interesting graph, shown at left. It compares the relationship of the Iowa Southern Minnesota Lean Hog Carcass price to the nearby Lean Hog Carcass futures contract. It goes on to show, as of the close on January 25th, 2006, the futures prices for contracts through the end of 2006. An item worth noting is the relationship of the cash market - (blue line) - and the nearby futures – (red line) - for the majority of 2005.

The difference between the two lines which represents basis; the local cash market price minus the price of the nearby futures contract. Note that the difference appears to be consistently negative after November 3rd, 2005 and wider, more negative, as well. If we assume that the more negative basis continues, the December close just under $52.00, with a -$5.00 basis, gives about $35.00 live price per cwt. December is often a time of much weaker basis, a wider spread than average, so basis may be even more negative than indicated here.

Cash markets have been declining, pulling futures markets down. While demand is still an issue, there seems to be a supply problem. Meyers and Steiner note that US-Canadian pork production total for the week ending Jan 14, 2006, was over 5% larger than the same period in 2005. Going back to demand, while the export market in beef has had some difficulty, it does not appear that this will be a long drawn out problem. Also, despite the recent BSE problem in Canada, major border issues have a process for resolution now. Having the process in place will likely make disruptions more short term than previously experienced. Thus, the impact for pork by beef export problems is not great; in fact pork is going to be challenged to maintain its gains, and perhaps be able to add a modest increase for 2006. Any increase in exports over 2005 will be a great accomplishment.

On the domestic side, where most of our pork production is sold, we still have softening demand. The chart on the left shows the demand indexes as developed at the University of Missouri. Demand for pork has risen since 1998, but softened from 2004 to 2005. Beef demand also softened, while broiler demand has continued a steady rise. Pork and beef are working on marketing now, but still have some catching up to do to make their products as convenient and saleable as poultry.

Overall, 2006 has more downside potential than upside potential. Futures markets are, with the exception of February, posting slight gains. The moves upward should be watched as they represent an opportunity to apply risk management. The price rises in August, October and December are encouraging. There may be an opportunity for prices above breakeven, using $40.00 as costs plus a $2.00 basis, or $42.00 live per cwt. That would be $56.75 in the lean as a starting point.

Low feed cost will remain an important component of profitability this year. Looking at Omaha corn, it was $1.94 at the end of last week, and $1.75 for the same week last year. The 19¢ increase represents nearly an 11% percent higher price. While cheap enough, much increase in feed costs, with the current live hog price outlook, could quickly reduce profits.

Source: University of Nebraska's Pork Central - February 2006

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