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Pork Commentary: Thank Goodness for Slaughter Capacity

by 5m Editor
11 October 2006, at 2:07pm

CANADA - This weeks North American Pork Commentary from Jim Long.

Last week the US hog industry marketed 2.159 million hogs (compared to last year’s 2.079 million). The Iowa-Minnesota lean hog price averaged 66.14 on Friday. Huge kills and hog prices that are still giving producers $20.00 per head profits. It is some kind of miracle.

Pork demand is good but a major trigger in this scenario has been the increase in packer capacity. In the not too distant past when we exceeded 2 million head per week marketings, packers had the hammer. Slaughter capacity was such that they could buy hogs at lower prices and have excellent margins. Now with daily packer capacity reaching 420,000, a 2.1 million kill can be done with little stress on shackle space. Indeed, all you have to look at is US Pork Cut-outs at 68.42 compared to the Iowa-Minnesota lean hog price of 66.14 at the end of last week. If anyone in the not too distant past had said that with weekly marketings of 2.159 million the price spread would be only $2.00 a hundred weight, that individual would have been told “Not in your life, Einstein.”

If you are a regular reader of our commentary, you are aware that we have been quite aggressive over the last year on lean hog pricing relative to fellow guessers. One of the cornerstones of our pricing scenarios has been our belief that the US packing industry, which is owned in large part by corporations with billions of dollars in assets, is hypercompetitive. The corporations are not only large and well funded, but aggressive by nature and culture, having invested large sums in ongoing plant efficiency technology, while being competitive marketing domestically and internationally. One other factor which was pointed out to us a year ago by a senior packer is that the major players are all meat companies and are not corporate conglomerates. Today, when you look at Smithfield Foods, Tyson, Swift, Hormel, Cargill, Triumph, etc, you see dedicated meat companies and ag corporations. This is their core business. It’s not Phillip Morris or like as in past.

All producers are benefiting from the hypercompetiveness between the packers. Its why prices are higher than many expected. Its packer “Mano a Mano”. None will let their foot off the accelerator going into the corner. They will continue to pay close to cut-out values. The battle is for market share retention and expansion. Their accountants calculate that shackle space optimization is the path to lower costs. This pushes hog prices higher trying to keep the lines full. When it now takes almost 420,000 head a day to get it done, prices are stronger. Despite what the accountants might wish, there are only so many hogs. Thank goodness for slaughter capacity.

Other Observations

The latest Iowa-Minnesota weekly slaughter weights indicate 265.8 lbs live weight, which is one half pound lower that the same week a year ago. The first time year over year weights have been lower since the end of June. These lower weights are a reflection of a current market hog inventory, pulled lower by aggressive marketings. We believe this is a real positive sign, which will help keep hog prices profitable through the fall.

Parks has a Party

Last weekend Lawrence Parks and Parks Livestock celebrated 30 years in business, with a party at the Rivers Landing Golf and Residential community in North Carolina. Rivers Landing was conceived and built by Wendell Murphy of Murphy Farms Fame. Approximately 300 people attended the Parks event which included a golf tournament and reception banquet.

Lawrence Parks, founder of Parks Livestock, has lived a Middle America Horatio Alger story. Just out of high school, Lawrence began to purchase cull sows at his first location in Oakwood, Illinois. From this small beginning, Lawrence has lead Parks Livestock into becoming a company with 21 locations in the US and Canada. Currently procuring almost 1.5 million head per year, Parks interests include slaughtering facilities in Canada, USA and swine marketing to Mexico.

30 years ago the cull business had little consolidation or sophistication. Lawrence was one of the first to develop a category system of grading that has focused on the need of many niche buyers. Lawrence, the innovator, has developed long term contractual relationships with sow herd owners to market their cull sows on a shared return basis. Currently, Parks has almost one million sows on this contractual arrangement.

All producers in Canada can thank Lawrence for bringing competition into the Canadian Market. In 1998, I met Lawrence just as he entered the Canadian market in partnership at that time with M & F Livestock. Sows in Canada were bringing $35-$50 per head less than in the US. There was what might be characterized as a cartel. Packers were getting the benefit of cheap sows. Lawrence through much perseverance and tenacity established a presence in Eastern and Western Canada. Since then, the competition he brought to Canada has leveled the playing field - a huge benefit for Canadian producers.

We salute Lawrence Parks, his family and employees for 30 years of success. A success accomplished by hard work, innovation, tenacity, vision and courage.

5m Editor