Market Preview: It's Only September!

US - Weekly U.S. Market Preview w/e 8th September, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 8 September 2006
clock icon 5 minute read

What a remarkable few days for U.S. hog slaughter. The three largest days in history for FI slaughter were last Thursday, and Tuesday and Wednesday of this week. Thursday was like one of those unfortunate Olympic swimmers who set a world record in the afternoon and saw four people break it by dinner time. The record of 410,000 lasted until Tuesday's record of 416,000, and then Wednesday sneaked into second place at 414,000. Note that the daily estimate for December 19, 1998, was 420,000 head, but that was a Monday, and it included a large Sunday slaughter during the infamous hog glut -- so it doesn't count as a daily record in my book.

The truly remarkable occurrence is that prices have held firm and even increased. Wednesday's national weighted average base price in the afternoon report was up over $1/cwt carcass from Tuesday. Thursday morning's national weighted average base price in the prior day report is up over $1.50/cwt carcass. The net prices in Thursday morning's prior day slaughter report are, with the exception of prices based on other market (ie. lean hog futures) formulas, all between $68 and $70. And it's September!

These figures reflect the fact that live hog demand has strengthened dramatically since spring. Professor Glenn Grimes' calculations for January-July show it down only 1% from last year after having been down nearly 3% as recently as May. Furthermore, live hog demand really did not begin to soften until the second half of 2005, so this January-July comparison is using relatively good times in 2005 as the comparison base. The numbers may get better as we conclude 2006 because we will be comparing to a falling base in 2005.

Add to this that January-July does not include an increase in live hog demand due to the commencement of second shift operations at the Triumph Foods plant in St. Joseph, which didn't get rolling until August, and have progressed rapidly. The plant's impact has yet to show up in Professor Grimes calculations, but it is being seen in the cash hog prices of recent weeks.

All of this strength in cash hogs has driven CME Hog Futures contracts to new contract-life highs this week. Selling into this rising market may have left you with some margin calls but will not have left you with any red ink -- and probably left some nice profit margins. I still believe incremental selling into this market is prudent. No, you won't get the highest possible price, but you will get profits that you never thought would be there, and you will free up time to use to do other important things -- like fine-tuning your breeding or nursery management or helping that son or daughter prepare for bow hunting or basketball. Don't forget the real important things in life!

The average national weighted average net price for year-to-date 2006 is just over $64/cwt carcass. Given the recent strength of cash prices, October LH futures at $67+ and December LH futures at $64+, that number will probably rise a little between now and year's end. CME Lean Hogs futures for February through October 2007 (the last contract on the board right now) averaged $64.08 at mid-session on Thursday. There is not much basis between CME Lean Hogs futures prices and the national weighted average net price, so these futures prices are a good estimate of next year's price -- and are available for you to take a look at right now.

Did you ever really expect to get to sell hogs in 2007 for as much as you sold them for in 2006? Truly remarkable.

And why has this happened? Exports are a big factor, and new plant capacity is another, but the extremely measured response of producers to good times is the real hero. Figure 1 shows the U.S. breeding herd for each quarter since 1980. The herd bottomed out at 5.937 million in March 2004 and has grown more or less steadily and SLOWLY since then.

I said in late 2004 that I would expect the breeding herd to grow 3-4% in this expansion phase. Using the December 2004 number of 5.969 million head, that would have put the herd at 6.15 to 6.21 million head at its peak about two years later. That's the historical pattern.

So how have we done? Assuming that the breeding herd on December 1 is 1% larger than one year ago, the December herd will number 6.071 million head, 80,000 to 140,000 smaller than I believed would be the case. Many industry observers believe those additional sows are still coming -- and I agree with them. Another 100,000 sows will likely go into production over the next year or so. But they are coming slower than anyone expected and that is a very good thing for the hog market. Keep up the good (and slow!) work.

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