CME: Drop in Hog Prices from April to May

US - CME's Daily Livestock Report for 20 may 2009 reports that cash hog prices gave back nearly $4/cwt of their hard-fought post-influenza gains the past two days after getting back above April 24 price levels late last week.
calendar icon 21 May 2009
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PLEASE NOTE: CME Group Commodity markets will be closed on Monday, May 25 in observance of Memorial Day — HOWEVER Globex electronic markets will re-open at 5:00 p.m. on Monday! For a detailed holiday schedule for Globex, click here.

The chart below shows average base prices (ie. they do not include carcass merit premiums or discounts) for the four pricing methods tracked by USDA and the weighted average across those four pricing methods. That last one — noted by “All Pricing Methods“ in the chart — would be the closest approximation to average producer revenues per hundred pounds of carcass weight. Average leanness premiums of $1.50 to $2.00/cwt are received in addition to these base prices.

The normal pattern for late April through mid-May, of course, is for hog prices to rise. USDA has been collecting hog prices under the mandatory reporting system and publishing them in these four categories since the summer of 2001. The 24 April to 19 May rise in Negotiated hog prices has ranged from $4.63/cwt in 2007 to $14.67/cwt in 2004 and has averaged $7.87/cwt. The weighted average for All Pricing Methods has risen by a low of $3.66/cwt in 2007 and a high of $13.36/cwt in 2004 with the average over the 7 years (2002 to 2008) being $7.31/cwt. The two prices have DECLINED by $1.76/cwt and $0.92/cwt over the same period this year.

This litany is not meant to engender sympathy for pork producers but to point out that the drop in hog prices from April 24 through May 8 and the lack of ANY spring rally so far has cost producers millions of dollars; dollars which the vast majority needed badly given the losses since September 2007. The result? Very likely a new round of sow liquidation and tighter hog supplies one year hence.

Some producers, of course, protected themselves with futures and options that have enhanced prices to the level of the Other Market Formula price (the pink line) in this chart. But those have barely been breakeven for much of 2009. And even the Other Market Formula prices will decline over time since futures markets are not offering pricing opportunities nearly as attractive as these past ones for coming months.

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