Pork Commentary: Hog Prices Collapse

by 5m Editor
3 September 2008, at 12:51pm

CANADA - This week's North American Pork Commentary from Jim Long.

We warned a few weeks ago that Oct-Dec lean hog futures looked very good compared to where we thought supply would lead prices this fall. Unfortunately, we could have been right. This past week lean hog prices in Iowa-Minnesota declined from 81.55 to 68.34 (-$26.00 per head), while week to week carcass cut-outs dropped from 90.31 to 80.51. In the last two weeks lean hogs Iowa-Minnesota have declined from 85.84 to 68.34 – a drop of $34.00 per head. It's ugly and with feed prices where they are, most producers will be once again losing money. We fear lean hog prices touching the high 40’s to low 50’s this fall when we consider what we expect will be weekly U.S. marketings over 2.4 million head.

With costs of production of around 80¢ lean, it could lead to sustain losses of over $40 per head. Something none of us need. Where is the silver lining?

Lean hog futures closed Friday with October 68.52 and December 68.95. These prices are at levels, though unprofitable, could be significantly better than the fall cash prices.

Chicken production is being cut back. Pilgrims Pride (U.S. largest) expects to be down 5-7% this fall.

Cagles Inc. -4%
Fieldale Farms Corp -5%
Simmon Foods -6%
Wayne Farms LLC -6%

While Foster Farms and Sanderson Farms have called off expansion plans.

Less chicken this fall will be price supportive to pork prices. As announced, these production decreases are millions and millions of fewer chickens.

Future cattle prices this fall are currently October 1.04 and 1.06 lb. High beef prices would certainly contribute to supporting hog prices (pork) this fall as the price points of each commodity widens.

Right now, announced cut-backs in Russian pork import quotas, Mexico and USDA issues and supposed China pork import opportunities have hit the market hard. We suspect all issues will get resolved. The price of market hogs in Russia are $360 per head. Producers are making $150 plus per head. They do not need protection from pork Imports. Cut-backs in pork imports to Russia will push up prices to their domestic consumer. We expect imports to continue.

Mexico and USDA issues should get resolved. Neither can afford a war on food safety. There is no winner.

China – it's amazing how one week they are importing, next week the psychology changes? Seems too abrupt. We have been to China. Can't imagine anyone knows how many pigs are there. To say demand has dropped because the Olympics is over is bizarre. There are 1.3 billion people. Why did they eat more pork because the Olympics were on? Market babble in our opinion.

Smithfield Foods

It's been a tough time in the hog industry. Smithfield Foods, the world's largest hog producer, is not immune. Smithfield announced its quarterly results last week. The hog production segment lost 38.8 million dollars last quarter (ending July 27) compared to a profit of $93 million in the same quarter last year. Smithfield said their cost of production for the quarter was 61¢ per lb (liveweight) versus 49¢ per lb last year.

We expect Smithfield's results are a barometer for our whole industry. Increased costs of production are pushing breakevens to unprecedented levels. When we look at Smithfield's result, it's like looking in the mirror. It's all our own reality. They used to say as goes general motors, so goes the U.S. economy. In the hog industry of today, it's not a reach to say, “As goes Smithfield as goes the hog industry.“

Maple Leaf Foods

Maple Leaf Foods, Canada's largest food company, has unfortunately been associated with a Listeria issue linked to one of their meat processing plants. Several people have allegedly died. It's a terrible situation for Maple Leaf, for the people affected, and for the whole Canadian livestock and poultry industry. Maple Leaf and its CEO Michael McCain have, to their credit, taken the issue head on. Not only taking responsibility but not assigning blame. They have been public and forthcoming. It's sad, and now the ambulance chaser lawyers are getting into the game with class-action suits. A wounded Maple Leaf is a loss for the Canadian pork industry. There are no winners in this situation.