CME: Why the Rapid Drop in Spot Prices?

by 5m Editor
4 November 2008, at 10:12am

US - CME's Daily Livestock Report for 3rd November 2008.

Cash hog prices continued to decline last week and fell below the 5-year average for the first time since April. While still higher than one year ago, this year’s late summer and fall decline has been larger — primarily due to its commencing at record highs back in August.

The chart (please see below) shows the national weighted average base price for prior day negotiated hog purchases. That’s a long name but it is important. USDA publishes a lot of hog prices — prior day, morning, afternoon, purchased hogs, slaughtered hogs, base cost, base prices, net prices, etc. etc. etc. The price depicted at right is the closest thing to a national “spot” hog price. It is the price of the pigs purchased the prior day through lot by lot negotiations between buyers and sellers. Since it is for animals that have not yet been slaughtered, no carcass measurements have yet been taken and thus net prices (which include premiums and discounts) have not yet been determined. So, the base price is all that is available. The prices from both the western and eastern Cornbelt regions are included, weighted by number of head.

So why is this spot price falling so rapidly? The short answer is “Product values.” The chart for the pork cutout value looks almost identical to this hog price chart. Cutout values fell by $2.19/cwt carcass last week while the spot hog price was $2.23/cwt lower. The bigger question, of course, is “Why are product values falling?”

The answer is not supply. U.S. federally-inspected (FI) hog slaughter has been below the level predicted by the September Hogs and Pigs report in 7 of the past 8 weeks. Since September 1, FI slaughter has been 543,300 head lower than our forecasts and our forecasts had allowed for 1% fewer Canadian market hogs per week. The shortfall of Canadian hog has, in fact, been larger than 1% but still only explains about half of the difference between actual and predicted slaughter levels. Most (469,000 head) of the cumulative shortfall in hog numbers has occurred in the past 5 weeks — a time period when USDA’s September 1 120- to 179-lb. inventories should have accounted for much of the slaughter. Recall that that inventory figure, at +6.1% from one year ago, was much larger than expected. It is beginning to appear that at least that number was high. The first of the pigs in the September 1 60- to 119-lb category should reach market weight in the next couple of weeks. It will be interesting to see how those numbers compare to the expected levels. Barrow and gilt weights have increased both seasonally and relative to last year but are not adding to year-over-year pork supplies at this point.

It certainly appears that demand is the culprit. Without timely export data, we must rely on anecdotal reports that exports have fallen sharply. Russia is apparently out of the market at present. The stronger dollar has left Canada more competitive in Japan and the sharp decline in the value of the peso has reduced the buying power of Mexican importers at a time when a stronger peso would likely have been used to take advantage of seasonally lower prices.

Further Reading

- You can view the September Hogs and Pigs Report by clicking here.

5m Editor