Pork Commentary: Storm Clouds on the Horizon?

CANADA - The Iowa-Minnesota lean hog price average was $67.44 last Friday; down from last weeks $70.13. Producers had no problem delivering up all the hogs packers wanted with 1.954 million slaughtered. The previous holiday week was 1.638 million. A year ago it was 1.869 million.
calendar icon 19 July 2006
clock icon 5 minute read

The last two weeks average of US marketing’s was 1.796 million. We expect packers will have to have to bid significantly higher this coming week if they try to procure over 1.95 million head. To get this done producer psychology must be reinforced that the high price of the year has been reached and every day a hog stays in the barn means the price will be lower. We expect slaughter weights will drop significantly over the next few days due to high temperatures, humidity and from pulling hogs to market earlier.

One of the interesting things we have noticed is the USDA reports indicate packer owned hogs going to market are just a tad over 250 pounds live-weight. (All hog average is 263 pounds). From what we can discern, 250 pounds is the minimum weight that primals sizes work in most meat programs. Why would packers own hogs be so light?

  1. Need hogs to keep kills full
  2. Need kill numbers to keep pressure on hog prices.

In our opinion, one of the ramifications of packers owned hog’s being just over 250 pounds is that there is little room for them to further pull hogs forward themselves. The 250 pound live-weight average is probably the floor on weight. If the premise is right it should support hog prices short term.

We know the industry is currently profitable but we see the possibility of storm clouds on the horizon. Breeding herd expansion is ramping up as producers, after two years of good profits regain confidence and equity. Corn and soybean supply and demand appears to indicate higher prices. A lower US dollar not only makes pork less expensive in international markets, but also corn and soybeans. Ethanol production is taking corn out the feed equation. More hogs in the future and higher feed costs are setting up for hog prices that could be below breakeven by the fall of 2007.

It appears too many producers are forgetting the price and profit challenges experienced in the last decade. Our industry’s supply is an aggregate of thousands of producer decisions. We see the pendulum swinging from an industry wary and skeptical of the future to one that is like it was in 1997. (You can not have too many pigs, the more you have the more money you make). When we hear of finishers buying 60,000 feeder pigs a year and pocketing over a million dollars ($18-20 per head) we take note. Their return on investment is great. With this, the perception of risk gets diminished. Enthusiasm overcomes rationality.

Only a fool would believe $20.00 per head profitability is sustainable forever We are going to see losses, and the longer we have higher profits the chance of expansion that could lead to devastating low prices gets greater.

It is tough for us to be bearish, it is not in our personality. If anything we are usually too early and too bullish. We are concerned about what we see happening. We were there in 1997 when there was only bullish sentiment. We lived through the debacle that followed. We know the financial carnage.

The next low will separate the boys from the men once again. There is no guaranteed survivors. In 1997 a list of Murphy Farms, Carroll Foods, National Farms, Premium Standard Farms, Heartland Pork etc as future industry casualties would have been laughed at. No one knows the future. It is all just guesses.

Are we on a reckless expansion to hog price Armageddon. We hope not. Maybe some of the planned expansion won’t get done. Maybe PRRS and Circovirus will continue to kill enough pigs to keep limiting supply and strengthen prices, while pork export markets continue to set records.

The Good News: The extra sows are not in place yet to destroy the market. Hopefully our concerns are just ranting or paranoia of people who have been in the business long enough to have seen too much heartache and pain.

Written by Jim Long, Genesus Genetics / Keystone Pig Advancement Inc. - 18th July 2006 - Reproduced courtesy Farms.com

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