Pork Commentary: Hog Prices Steady to Firm

CANADA - This weeks North American Pork Commentary from Jim Long
calendar icon 7 February 2007
clock icon 6 minute read

Last Friday Iowa-Minnesota average lean price was 62.39 ($0.46 lb Liveweight), below breakeven for many producers that are buying feed. With Thursdays USDA Pork Cut-outs averaging 63,08, quick arithmetic tells us that the spread between cut-outs and market price is less than $0.01 lb.

Usually there is at least a $0.05 lb spread. Something will have to give at $0.01 lb margin - packers are losing big time money. Either hog prices will go lower or cut-outs will go up. We lean toward the latter scenario as weekly hog marketing's are in a seasonal decline.

Last week the USDA slaughter was 2.045 million, or 1.8% lower than the previous week. In the next couple of weeks we expect near or below 2 million for the week. Less pork in the market place will maintain and strengthen pork salesmen's leverage on retailers.

Other Observations

Last week Sara Lee announced its pending closure of its slaughter plant in Mississippi. Not a real surprise a this had been expected in the industry for the last couple of years. Bad news for the producers in the region who have significantly higher trucking costs to get their hogs north. The Swift Plant in Louisville Kentucky and the Cargill plant in Beardstown, Illinois could benefit significantly from this pending closure. Prestage Farms has major production interests in Mississippi but we understand that they had already begun moving small pigs to Iowa for finishing. Prestage is one of the large operators in this business and its not too hard to believe they had seen the writing on the wall. While Prestage has critical mass, expertise and capital to shift finishing production, other producers in the Sara Lee area are not as fortunate and we expect a number of them will exit the business. This plant closing will not only decrease shackle space but also decrease US hog production.

Olymel in Canada last week announced they are planning on closing a plant in Quebec that slaughters approximately 28,000 par week. We understand Olymel had asked their workers to accept wage contract concessions that would have lowered hourly wages from $28.00 per hour to $22.00 per hour. By a large majority the Union rejected this proposal. Olymel then announced the pending closure of the plant in four months. Stay tuned - unlike the Sara Lee plant, of which there is no hope of staying open, we expect further discussion or to put it more aptly, more games of Chicken in the Olymel situation. This being Canada and Quebec we expect Olymel (which has been losing $1 million a week for three years) and the Union to look for government assistance. Olymel had hired the former Premier (Governor) of Quebec, Lucien Bouchard, to help develop a turnaround plan and you don't hire former politicians and lawyers to sell meat. They are looking at hoovering concessions and money from farmers, workers and government. As we say, stay-tuned. If in the end the plant did close, there would be fewer sows in Quebec. Prices in Eastern Canada (Quebec and Ontario) basis to the US would be lower than even now as packer capacity would be negative to hog supply numbers of small pigs that are being purchased in Quebec from Ontario would in all probability be reneged on and those pigs would then move to the US.

The potential closure of Sara Lee's and Olymel's plants reflect another issue, the difficulty of high cost feed areas to sustain production and profitability. The new Triumph Plant in Illinois will replace shackle space lost by these two plants but it is in the corn belt. Hogs are continually moving to where there is cheaper feed and where manure can be utilized to its maximum.

There are few public disclosures of financial results of Hog companies and one of the few is Premium Standard Farms, who last week released their quarterly results. Premium Standard Farms (PSF) has approximately 225,000 sows, farrow to finish, with feed mills, packing and processing. PSF has previously announced plans 10 merge with Smithfield Foods.

In the nine months ending December 23, 2006 PSF had a net profit of $14.794 million, the year previously $41.356 million. If PSF is marketing 16 hogs per sow per year, the last nine month period profit per head would be (using 225,000 sows) about $5.00 per head. In the same time period the year previously it was $15.00 per head.

John Meyer (CEO and President of PSF) attributed the decline in profit year over year to Circo Virus problems, which has decreased pig volume. He expects to see better results by the fourth quarter of fiscal 2007.

We are not trying to pick on PSF, we believe the $5.00 per head profit is probably a fair barometer of the reality of many pork powerhouses and other producers. Hog Production and Profitability is always easy to figure on projections, however in real life it’s hard. So many things can go wrong –there is always a new disease to whack you, people and labour issues, spikes in feed prices and packer closures. Hog production is hard, it takes hard people.

Smithfield Foods two weeks ago announced their intention to end the use of gestation stalls in ten years. With their pending merger with Premium Standard Farms, Smithfield will have one million sows in the US or over 15% of all sows. Last week we projected that other packers and producers would quickly adjust to this new production reality. Last week Maple Leaf Foods, Canada's largest hog packer and producer, announced plans for a ten year phase out of gestation stalls in their own production system. In our opinion it’s all over, the momentum will not be stopped. The animal rightists have lost an issue, go pick on Chickens in cages.

Lean Hog Futures project a $0.50 lb liveweight average price for 2007, similar to what we projected for the last few months. The usual suspect ag-economists continue to question the future prices. We listened to them in October projecting $0.43 - $0.44 lb for 2007 and they are still beating this hollow drum. Get over it, you were wrong then and still are. There will be no more hogs in 2007, exports will grow, and we will have lower carcass weights. Domestic consumption will be steady and there will be production contraction. Prices will be $0.50 plus in 2007. $0.43 - $0.44 lb in your dreams.

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