CME: Higher Domestic Pork Demand

by 5m Editor
2 June 2008, at 11:13am

US - CME's Daily Livestock Report for 30th May 2008.

This week’s cash markets finished with a marginal year-onyear increase in cattle prices( 0.6% on the 5-area fed steers), a very small (-.1%) decline in the Choice beef cutout value and robust gains for both hog prices and cutout values relative to last year — all on larger supplies! Hog demand continues to be VERY STRONG while cattle demand appears to be holding its own . The University of Missouri estimates that January-April consumer level pork and beef demands are 3.5% higher and 2.6% lower, respectively than one year ago. At the same time, hog and cattle demands are 7.5% higher and 1.4% higher, respectively.

Higher domestic pork demand, exploding exports (which may well be enhanced by losses of pigs in the recent earthquake in China) and byproduct values still near record high are all contributing to strong hog demand. In fact, the downstream demands for pork products are so strong that extremely strong hog demand and very good packer margins (see Figure 1 on page 2) are co-existing — at least for now. Packers’ gross margins have INCREASED during the recent run-up in cash hog prices due to very good cutout values and record by-product values. Will packers fall back into the “get some margin then bid it away” syndrome that put margins on a roller coaster beginning in June of last year? We don’t think so — mainly because of larger hog supplies. Packers are likely to chase hogs this year only if product values and needs warrant it. They can likely run reasonably close to optimum throughput levels without bidding aggressively when product values do not warrant it.

E-Livestock Volume 5/30/08 5/29/08 5/23/08
LE (E-Live Cattle): 8,214 9,292 10,419
GF (E-Feeder Cattle): 209 207 175
HE (E-Lean Hogs): 18,781 15,810 10,114

Cattle demand is higher in spite of lower domestic beef demand and gross packer margins that are at their highest level in more than a year (see Figure 2). Why that relationship? A portion can be accounted for by increased exports which, though far short of their historic levels, are 77% higher than last year, accounting for 91.5 million pound less beef on the U.S. market. Perhaps more important is that beef by-product values also remain high. In fact, cattle by-product (or “drop” ) values have been higher than the pre-2007 record ($127.04/head set in January 2004) every week since last October. And perhaps even more important is last week’s news that product could begin moving to South Korea this week. Given the fickle nature of that situation, though, maybe we should take the viewpoint of a true Missourian — and demand that they “Show me!”

Steadily rising feed ingredient prices have driven Output Price:Feed Price ratios to record or near-record lows for all three major meat species (see Figure 4). The beef:corn ratio has dipped below 20 for the first time since the 1996 corn price spike while the broiler:corn ration has been below the previous record low of 3.9 (also reached in ‘96) since February. The hog:corn ratio has not reached a new record low yet but every month since October 2006 has been below 20, the long-held “tipping point” for the hog breeding herd. The hog:corn ratio has been below 12 for the past 8 months — a level reached only twice in the hogprice squeeze of 1998-99.

5m Editor