Pork Commentary: Have prices plateaued?

by 5m Editor
19 September 2007, at 10:49am

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

Lean hog prices showed some strength last week with Iowa-Minnesota averaging 63.70 (47.13 live) lb. This was up from 60.32 a week before. What is truly amazing is prices got stronger despite a US weekly kill of 2.226 million, the fourth largest weekly kill ever in the US. Marketings were up 88,000 head from the same week a year ago. Lean hog futures stayed relatively strong in the face of what we expect will be a deluge of hogs coming to market over the next several weeks. Chicago Mercantile Exchange Lean Hog Futures last Friday close Oct 65.55, Dec 68.52, Feb 72.17. Prices that are profitable for many producers.

We have pointed out for a couple years now that commodity markets have, in all likelihood, moved to a 30 year price plateau. That is, prices go up every thirty years and have for the last 150 years – never returning to where they were for any length of time. When we look at corn, wheat, soybeans, oil, metals, cattle and even hogs, we are seeing higher prices compared to other decades, despite record production in most of these commodities. The last plateau cycle was established in 1972. We are in the time frame. It is part of the phenomenon, that despite the 2.226 million hogs marketed last week, lean hog prices still remained at 63.70. We have been quite nervous of this fall’s hog market, when we see the number of hogs that are going to come to slaughter. Maybe it’s our problem and we are still scarred from 1998-2003, when the hog market was so unforgiving to the producer. It appears that 2 million plus hogs a week no longer brings 30¢ lb liveweight hogs. Domestic consumption and export markets, coupled with an extremely efficient US packing industry is keeping pork moving at prices that are not disastrous. Demand and other competitive meat prices are obviously price supportive.

Other Observations

Smithfield Foods is the largest hog producer in the world. In the fiscal quarter ending July 31st, they reported their US growing costs were 49¢ lb liveweight compared to 42¢ lb liveweight, the same quarter a year ago. The 49¢ lb is a direct reflection of higher feed costs we all have experienced since a year ago. The 49¢ lb growing cost is relevant because it shows the threshold that is needed to make money. We believe Smithfield’s growing costs are a good indicator of where the whole industry costs would be. Iowa-Minnesota live hogs were 47¢ last Friday. Unfortunately, we expect most producers are currently working for nothing.

We expect support for lean hog prices will come from the announcement of John Morrell (Smithfield Foods) to double shift their Sioux City plant increasing US kill capacity 7,000 head a day. We have said before, as the world’s largest hog producer, Smithfield has a vested interest to support hog prices. Not saying if that’s what they are doing here, but the 2nd shift in Sioux City will certainly be price supportive.

Spot feeder pigs and early weans continue to have a hard time getting returns that will be profitable for sow producers. It appears that the Midwest finishing infrastructure is full. We heard of spot early weans down to $12 last week. That doesn’t work for the sow producers. What is quite surprising is that February lean hogs are 72.17 last Friday, but supply and demand dynamics appear to be overcoming normal market pricing. Early weans should be bringing at least $35 a head. The market will adjust. It’s just a matter of when.

USDA is projecting a production of 13 billion plus bushels of corn this year. We do not see corn prices appreciating much from where they are. This fall’s harvest will push grain storage to beyond capacity and that will never be conducive for higher corn prices.

Big Road Trip

As we write this commentary, I am over the Pacific Ocean, on my way to Asia. Over the next two weeks, I will travel to South Korea, Japan, Cambodia and China as a guest of Biomin Corporation. They have organized six seminars, at which we will speak about productivity possibilities that our industry can achieve, with the main focus ‘30 Pigs – Fact or Fiction.’ We find it interesting that producers throughout the world are looking to increase productivity. Disease, feed costs, labour issues, environment are global issues. This makes productivity enhancement a necessity for all producers.

We look forward to sharing our observations on the countries that we visit in the next two weeks commentary. First week Korea, Japan and Cambodia (Southeast Asia). Second week China. We will report our observations on markets in China and try to get some first-hand insight on disease and Chinese supply issues.

5m Editor