Market Preview: Stuff Happens!

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 2 June 2009
clock icon 4 minute read

One of the big advantages of the new Weekly Preview publication schedule is that readers will get fresh data on prior week supplies and prices (see table below). You will now see Friday’s week-ending data on the following Monday morning. Except for this Monday morning for any of you who are particularly interested in Canadian data and prices. I apologize, but the Agriculture and Agri-Food Canada website from which I download these data was not operational over the weekend. Hopefully, they will have the problem corrected by next week.

If any readers are now ruing the day they either a) listened to or b) agreed with my conclusion back in March and April that a seasonal price rally was coming and it would bring with it better pricing opportunities for summer and fall hog sales, please realize that I am ruing the days I said it even more so. But I have no idea how I or any other analyst could have come to any other conclusion or could have in any way foreseen the havoc that has been caused by the H1N1 influenza virus. Stuff happens and this stuff happened at just about the worst possible moment.

My concerns are growing, though, because we are not rebounding from the worst of the price impacts. Figure 1 shows that negotiated base prices got hammered the week of 10 May, but then rebounded sharply the week of 17 May. But the past two weeks (with last week’s observation being the average through Thursday’s trade) have each seen negotiated prices fall by over $3/cwt., carcass. Not exactly a summer rally!

Figure 2 shows the same data for national net prices for all purchase methods. It paints a somewhat different picture, however, since this price series includes the prices of hogs sold on contracts. Both feed cost-based contracts and those tied to lean hogs futures have paid producers much higher prices than has the spot market for some time. But more importantly, these contract prices were not impacted by the influenza scare.

The ability to price hogs apart from the spot/negotiated daily market is one of the big reasons some producers like marketing contracts. Properly structured, they can provide stability not found in spot markets or in contracts tied to spot markets.

The question now is: “Can we see a rally?” I think the answer is “yes,” but demand has to be strong enough to sustain it. Figure 3 shows that 2002 was the last year that saw little or no spring/summer hog price rally. That year was characterized by higher year-on-year slaughter (from 4 to 8 per cent) for much of the spring, plus a Russian chicken embargo in March. It is not perfectly analogous, due to this year’s lower slaughter and production, but it did have its own demand challenge and prices rallied $11/cwt., carcass, from the end of May to the end of June. That would be good news indeed should it happen again this year!

Sharing the Pain

Finally, no matter how unfairly pork producers feel they have been treated by fate and the media in the H1N1 influenza virus fiasco, we have to feel bad about what is happening to cattle feeders and packers. Figure 4 shows the weighted average cutout value for Choice and Select beef carcasses. I don’t think it is a coincidence that the major rally we had seen in wholesale beef markets ended abruptly at the same time that the first H1N1 issues hit the pork market. And if pork producers were not at fault, the beef sector certainly was not!

What about chicken? The 12-City Composite broiler prices went from $77.14 the week of 25 April to $86.09 the week of 23 May. That’s a gain of nearly $9/cwt. or 11.6 per cent. Both Tyson and Sanderson Farms say their chicken production units are now back in the black.

Stuff happens, doesn’t it?

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