Market Preview: Markets' Ebbs and Flows Remain Baffling

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 13 September 2008
clock icon 4 minute read

My grandfather had a great saying for those things he considered unusual: “I’ve been to two county fairs and three goat ropings and I ain’t never seen nothing like this.“ Amen, Ervin. Amen.

If Ervin Rice was an economist instead of a hard-working roughneck, driller and tool pusher (those are oilfield jobs, in case you were wondering), he would say the same about the hog market this year. The ebbs and flows of costs and prices have been unprecedented.

Just last week in this column, I was trumpeting the achievement of a new record-high hog price. Prices have now fallen this week by about $17/cwt., carcass (see Figure 1), before stabilizing. Last week a caller asked me to explain this drop in hog prices and my response was, “I couldn’t explain the increase, so I feel no responsibility to explain the decline!“ But I have to give it a shot.

These price changes are not related to hog slaughter. Weights are running 4 lb. lower than last year, but they did not increase over the past two weeks, so one can’t explain the decline with heavy hogs either. In fact, I do not see a supply variable (including sow slaughter) that would have much impact.

So it must be demand. And you have read about the vacuum that exists when it comes to timely demand data. Every piece of anecdotal evidence points to a huge upward run on exports and then an abrupt halt. The fact that trimmings and hams led the upward charge in cutout value suggests exports.

Russia is frequently a player in the trimmings market and Mexico has been a big factor in the summer ham market for several years. And, lo and behold, there are now trade issues with both of them.

I don’t believe it is a coincidence that trimmings ran up just before Russia announced export reductions. Mexico is not happy about USDA’s Food Safety and Inspection Service (FSIS) finding that 19 Mexican plants did not meet U.S. standards. Mexico voluntarily stopped shipments from those plants and now there are scattered reports that loads of U.S. pork are being denied entry into Mexico. There is nothing official in those actions, but U.S. packers are increasingly concerned.

So exports giveth and exports taketh away. Such will be life when we depend on exports for a substantial portion of our well-being. Exports accounted for 21.5% of production in April and 26.5% in both May and June – over one of every four pounds produced. Any little glitches will be important. We have probably seen that recently but, due to the lag of pork export data, we will not know what happened in August until October.

Profit Prospects

Chicago Mercantile Exchange (CME) Group Lean Hog futures prices have declined along with the cash market. The roughly $7 decline in hog futures has more than offset the decline in both corn and soybean meal to leave the profit prospect for 2009 at their lowest levels since July 1 (see Figure 2). My forecasts for costs and prices show only three profitable months next year and some losses of near $40/head this fall.

Will those provide enough incentive to reduce the sow herd more? It hasn’t yet, but it certainly could. I expect only a 2% decline for the U.S. breeding herd when the quarterly Hogs and Pigs Report is released on Sept. 26. If that is the size of the reduction, slaughter numbers in 2009 will not be much lower than those of 2008. Imports from Canada will be lower, but productivity increases will provide plenty of pigs.

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