Market Preview: Skittish About Fall Hog Prices

US - Weekly U.S. Market Preview for 2nd June, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 3 June 2006
clock icon 5 minute read

Let's see -- pork and hog demand are down, Russia is still refusing to import part of our ample chicken supply, Korea and Japan are talking sweetly, but have yet to import any more U.S. beef, and hog slaughter has been above year-ago and predicted levels for three of the last five weeks. And, Lean Hogs futures at the Chicago Mercantile Exchange hit three-month highs today. Sometimes, things just don't add up.

The most recent demand index computations from the University of Missouri do not bode well for meat demand in general, and pork demand in particular. Consumer-level pork demand for January-April of this year was 6.2% lower than one year ago. Beef demand was 4.1% lower. Even chicken demand was lower by 5.2%.

I have thought for some time that extremely low wholesale chicken prices would eventually show up in retail price data. It appears that has finally happened. If U.S. consumers are eating more protein, they sure aren't paying more for it at present.

While chicken and beef supplies are quite large, U.S. federally inspected hog slaughter remains quite close to one year ago. Figure 1 shows actual federally inspected weekly hog slaughter for last year and this year and predicted weekly slaughter levels for the remainder of 2006, plus the first quarter of 2007, based on USDA's March Hogs and Pigs Report.

Actual slaughter from March 1 has been 1.1% larger than last year, but only 0.4% larger than the level indicated by March 1 hog inventories. Higher slaughter weights have added pounds to the production total, but the increase in pork supplies is much less than increases in the other major species.

Disruptions due to immigration reform rallies/protests are a major reason that three recent weeks have seen higher-than-expected slaughter. Packers made up for missed days by adding hours and Saturday kills, leaving the non-affected weeks with higher slaughter totals. I haven't heard much more about these protests, so I expect slaughter to stabilize a bit once we get away from Memorial Day week.

Meat and hog prices are still lower than one year ago, but the differences are shrinking -- not so much because of recent cash strength, but more due to rapidly falling prices at this time one year ago. I'm still impressed that we have held hog prices in the mid- to upper-$60s in the presence of so much beef and chicken.

This week has indeed been a recovery for Lean Hogs futures with several contracts (June, July and October) penetrating key resistance levels. August is setting a new contract life high and December is getting quite close to doing the same. With soft consumer-level demand and higher supplies on the way, I am still skittish about hog prices this fall, even though Figure 2 shows that current futures price suggests base prices that will generally be in the black for average producers this fall.

Future Corn Costs Fuzzy

The wild card is feed costs. Figure 3 shows my index of hog feed costs -- the cost of the corn and soybean meal to make a 16% crude protein diet. This index was quite low in late 2004 and 2005 when the two largest crops on record were harvested. However, note that earlier in both of those years, the futures markets were telling us a very different tale.

The same is true of the present. There is always a weather premium in the corn market at this time of the year. If rains and temperatures are conducive to good crop development during June, corn futures will fall. If not, the weather premium may not be large enough.

The difference in the current corn cost situation is the "ethanol" premium, which is in this market somewhat for 2006, and in it big time for 2007 and beyond. It certainly appears that traders are banking on continued high oil prices and, quite possibly, an increase in the mandated levels of renewable fuels. I agree, but I don't think they will stay in the $70/barrel range; I have a lot of confidence in human ingenuity and greed!

I still don't believe that policy-makers have fully estimated or considered the potential harm that subsidized and protected ethanol production and mandated ethanol usage might do to the U.S. livestock sector. Look for more on this subject in coming months as full-fledged farm bill debates begin.
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