Pork Commentary: Lean Hog Futures Break $100

by 5m Editor
8 July 2008, at 3:08pm

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

Never before have the lean hog futures exceeded $100, but on June 19, 2008 they closed at $100.20. That is a new record. We have had little good news as an industry the last few months but breaking this milestone gives reason for optimism. Last Thursday lower Minnesota’s lean hog price averaged $68.52. June futures indicate $60.00 per head appreciation to the current cash market.

The June USDA Hogs and Pigs Report was considered bearish with the inventory exceeding industry guesses. The good news after four trading days; July lean hog futures were 72.27 down less than a dollar compared to October 2007 at 69.45 which was down from 71.88. The market has so far handled the news with little damage.

The American Pork Cut-Out last Thursday was 78.74. That is 10¢ over the Iowa/Minnesota average lean price. It appears packers have margin and in our opinion will keep pushing slaughter levels. Last week there were some days that the USDA average slaughter weights were 258lbs. This is a rapid weight decline. We continue to believe weights are coming down faster than the weather and seasonality warrant. Hogs are being pulled ahead. We expect American slaughter will be smaller than the USDA inventory projects. Last week American slaughter was about 3% higher than a year ago but projections indicate we are supposed to be 10% greater.

Corn Crop

The USDA released corn planting data last week. Whoa and behold: 2 million more acres than the average trade guess. That’s a lot…87.3 million acres!!! Canada’s grain crop was up 3 million acres. Mexico’s corn crop up 20%. Australia’s grain crop up of 10 million tonnes. Europe’s grain crop up 14%. And It goes on and on. Give farmers profits see the increase in production. The insanity of burning food for fuel (corn ethanol) with its economic, social, and political implications is alternating the world food supply. Closer to home corn ethanol is pounding the hog industry. At historically high hog prices the industry is losing money. Early weans are trading for $3.00 to $5.00. Some are being euthanized. The reality of today is that at the level of $3.00 to $5.00 most pigs should be euthanized. They have no value to the seller. Their presence is bulldozing the infrastructure but more importantly preventing price appreciation. Everyone has to make decisions based on their own circumstances but it is hard to see any silver lining in selling $3.00 pigs.

Sow Slaughter

The latest U.S. weekly sow slaughter was 69,200 up from 7,200 from the same week a year ago. We believe the U.S. sow herd is continuing to decrease at a minimum of 5,000 head per week. By September the American sow herd will be at least 150,000 lower than September 2007. We understand that the United States has the sow slaughter capacity of about 100,000 head per week. The challenge is sow meat goes mainly into sausage. Sausage is made from fresh product. There is little frozen. Sausage companies, no matter what the price of sows, do not want to slaughter more than they can sell as sausage. We understand sows cannot get marketed and are being held. One solution is for the USDA, like Canada did, is to purchase live sows and render the carcasses. Get them dead. We need to continually make all efforts to lower production.

We read a report this past week from Mexico’s agriculture officials (Excelsior Newspaper) that the herd has been liquidated by 25% or 250,000 sows. Mexico’s hog prices last week were 18 pesos per kilogram (which is about 80¢ U.S. live weight per pound) we hear about the shortage of containers for export but obviously refrigerated trailers are what goes to Mexico. Mexico like other countries in the world have cut meat protein production. We believe pork exports will continue to rise as the world tries to fill the holes of meat production. We have June lean hogs at $100 now. We expect $110 with a $120 upside. We are in uncharted waters. The losses in swine production are, and have been, significant. Supply is declining throughout North America. The North American herd could be 400,000 less sows than its peak now and it is getting smaller.

In the next few days we are taking a road tour through the mid-west.

5m Editor