ShapeShapeauthorShapechevroncrossShapeShapeShapeGrouphamburgerhomeGroupmagnifyShapeShapeShaperssShape

30 Year Price Plateau Reached?

by 5m Editor
25 April 2007, at 11:41am

The Iowa-Minnesota price last Friday averaged 66.81, up $5.00 in two weeks, or about $10.00 per head. With May lean hog futures closing last Friday at 77.52, it doesn’t a rocket scientist to figure out that there is an excellent chance of adding another $20.00 plus per head in the next 4 weeks. $30.00 in 6 weeks, writes Jim Long.

Can’t say this is a boring business, can you? $30.00 is the difference between sucking air and being a skilled businessman. It will be interesting to see if producers try to hold hogs to hit what appears to be a rapid price surge. Of course, if hogs are held back in the barns, it will force packers and meat buyers to push prices higher, quicker. But whatever happens, hog prices are on their way higher and will get there fast. Pork cut-outs averaged 70.53 last Thursday and it needs to continue to increase, allowing packers to pay more and more for hogs in the weeks ahead.

USDA hog marketings last week were 1.984 million. A year ago the same week, 1.971 million. We expect to see lower marketings in the weeks ahead which is the driver for the higher lean hog prices.

Packers Owning Hogs

There has always been discussion about the relative merits to the marketplace of packers owning hogs. Different packers have varying forms of ownership. These include Smithfield Foods, Maple Leaf Foods, Premium Standard Farms, Hormel, etc. Not to pick on Smithfield, but as a friend of ours says they are the ‘Big Dog’. Using 800,000 sows as their current production base and 17 hogs marketed per sow per year. The Smithfield group would be marketing about 260,000 head per week. Put $30.00 per head on a market hog and their opportunity revenue jumps $7.5 million a week. Of course, all producers gain with a $30.00 per head increase, not just Smithfield, including all other packers owning hogs. Our point is Smithfield and other packers that own hogs have a financial reason to get hog prices higher. A vested interest, you could say. In reality, there is no price control in the pork meat marketplace by packers, as commodity producers and in a constant push shove with the likes of Wal-Mart. Our main point though is packers that own hogs have little reason to push hog prices lower. They look at how to hold or increase. In our minds, a benefit to all hog producers.

Competing Meats

In 2007, the US has more pork, more beef, more turkey and fewer chickens than 2006. Feed prices are significantly higher, but what is interesting is that all prices for each commodity are higher than a year ago.

Week Ending April 14

2006 2007 Percent Change Year To Date Slaughter Difference
Live Fed Steer 84 99 17.4% 3.5%
Chicken-12 City Broiler 59 79 33.9% -2.8%
Turkey 70 74 -6.2% 1.7%
Iowa-Minn Lean Hog 51 63 23.8% 1.8%

The surge in prices is quite interesting to us. We have heard that higher fuel prices were going to eat into disposal income for meat. Does not seem to be happening. More total meat available and dramatically higher prices. Exports are also helping prices, coupled with a lower US dollar relative to most world currencies.

New Price Plateau

We believe that the thirty year new price plateaus that have happened over the last 150 years are being put in place. The last plateau, 1972 - the previous, 1942. This is when livestock prices reach a level that are significantly higher than the last three decades and remain there. Not to say the hog industry will not lose money again, but inflationary costs of production such as feed, building costs, labour, energy, etc. all reach levels that help sustain price points. A simple example is new sow units. We have customers with sow units that produce early weans that cost $700 per sow when built not much more than a decade ago. Today, it costs about $1500 per sow. The $700 unit can produce 25 pigs; the $1500 unit can produce 25. The technology in the barns has changed little in the last ten years. Each have access to the same genetics, feed, vaccines and each have the same labour and environmental challenges. Both units are susceptible to Circo, PRRS, etc.

All costs are higher today than a decade ago to produce an early wean. Obviously, you need more money to make a profit. Last week, we reported that a large production group claims it takes $38.00 (used to be $27.00) to produce an early wean in a new barn at current feed prices. Few will build barns for breakeven.

The same scenario for finishers, chicken producers, turkeys, cattle, etc. - all costs are higher.

The only way for all commodities in any production system to be sustainable is higher price points. The surge we have seen in all costs since 1972 cannot be made up by production gains. We expect the thirty year plateau has hit. Going forward, we see prices for early weans, market hogs, grain, turkeys, beef all remaining relatively higher than we have seen for the last thirty years.

Summary

Lean hog prices have jumped $10.00 per head in the last two weeks. We expect another $20.00 in the next four weeks. Lean hog prices are on track to hit $80.00 plus this summer.

5m Editor