The packer margin situation is almost perfectly opposite in the pork industry. Pork packers have run positively dismal gross margins since late last October — following near-record gross margins last summer. What a dramatic shift in just a few short months. The sharp decline in packers’ total gross margin (Figure 3) began with last fall’s almost simultaneous drop in cutout and byproduct values (Figure 4). While byproduct values have recovered some since mid-December, pork cutout values have not kept pace with hog prices paid by packers, leaving the pork meat margin near record low the past three weeks. This is not due to high hog prices caused by a shortage of hogs. Slaughter totals have been just about as expected from the December Hogs and Pigs report and have remained above 2.2 million every non-holiday week so far in 2009. It appears that packers are trying to maintain slaughter levels and supplier and customer relationships until cutout values improve seasonally — but the effort is getting rather costly with margins this low.

The low margins are also not due to expanded capacity. In fact, US capacity is currently 3,800/day lower due to the recent closure of producer-owned Meadowbrook Farms in Illinois. The company says that the closure is temporary and due to a cash flow crunch precipitated by a major customer breaking a contract to buy value-added products. The customer, Triad Foods, maintains that the real problem was Meadowbrook’s inability to consistently deliver the contracted product.