Market Preview: Hog, Grain Markets Begin to Settle In

by 5m Editor
7 July 2007, at 6:50am

US - Weekly U.S. Market Preview w/e 6th July, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.

The reaction of Chicago Mercantile Exchange (CME) Lean Hogs futures prices to last week's USDA Hogs & Pigs Report was a bit more negative than I had expected, but the downward price move didn't last long as prices found support in Thursday's trading. The weakness in cash hogs was one reason futures were lower as Tuesday's national negotiated net price ($72.37/cwt. carcass) was $6 lower than just one week before.

All of the Lean Hogs contracts are within striking distance of key support set last January. Should that support be broken, the next objective down is roughly $6/cwt. carcass on all of the contracts. December is in the most vulnerable position at present.

While the prices on the Board are not nearly as good as they were back in March, or even mid-June, they may well be profitable for many producers, given the recent drop in corn futures prices.

Feed Costs Ease

The best recent economic development for the pork industry is the decline in corn prices since mid-June. December corn closed at $4.235/bu. on June 18, and has lost ground virtually every day since, closing on Thursday at $3.425 -- 81 cents/bu. (19.1%) lower. While soybean meal has gained value over that time, the relative importance of corn in hog diets has swamped that effect.

My feed costs index (Figure 1) shows that prospective costs for corn and soybean meal for the remainder of 2007 have fallen by $24 to $26/ton. Corn-soy costs for 2008 have declined by $10 to $20/ton.

These declines have taken prospective production costs back into the low-$60s on a carcass weight basis -- mid-$40s on a live weight basis. That means that most of the Lean Hogs futures prices are still at breakeven or above, so we probably haven't seen the last Hogs & Pigs Report with larger-than-last-year numbers.

The feed price crisis hasn't caused any shift in the pork industry, yet, because prices have been high enough to keep average producers in the black.

COOL Amendment Makes Sense

There is talk of amending a few provisions of the mandatory country-of-origin-labeling (MCOOL) law that is to go into effect in September 2008. If the law is to be amended, it needs to happen pretty quickly because some animals (breeding stock of all species and some calves) that will subject to the law are already on the ground.

For the record, in case you don't know where I stand on this issue, I am a vehement opponent of this law for a lot of reasons. But, short of repealing the law, one of the best ideas I have heard is to change the requirements for "Product of the U.S." status to include animals born in another country, but raised and fed in the United States. The idea is simple -- product from any animal shipped to slaughter from a U.S. herd or flock would qualify as "Product of the U.S." Product from any animal shipped from another country directly to slaughter in the United States would be labeled "Raised in Country X, Slaughtered in the U.S."

Yes, it does allow those dastardly Canadian-born lambs, calves and pigs to be labeled as U.S. product, but most of the weight those animals gain occurs in U.S. facilities, eating U.S. grain. That is especially true for pigs.

Figure 2 shows imports of pigs of all sizes from Canada. While market hogs and cull sows/boars (pigs weighing over 110 lb.) are currently the largest single class, weaned pigs and feeder pigs have accounted for about 65% of imports over the past three years. Further, the average weight of those pigs has been about 30 lb. If they go to market at the same weight as U.S.-born pigs, about 88% of their market weight was gained in the United States. Calling meat from that pig "Product of the U.S." seems reasonable.

If you don't like that reason, consider this: This change would mean that U.S. producers will not have to worry about records, affidavits, indemnifying packers and retailers, etc. at all. That includes all of the producers who feed U.S.-origin animals, exclusively.

In other words, if an animal begins its last ride at a location in the United States, it is U.S. product. If not, it is something else.

While this change would represent a big compromise for the true believers in MCOOL, it is such a cost-efficient one that it really should be considered. Producers should think it over carefully and let their Congressional delegation know how they feel.

5m Editor