Market Preview: Summer Market Dragged Down

US - US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 23 June 2009
clock icon 5 minute read

In last week’s Preview, I pointed out that one of the factors in lower-than-expected hog prices this summer is being driven by some unexpected production. Those extra head and extra pounds continue to be a drag on this market and have now persisted long enough to call into question some of the lighter-weight category inventory numbers in USDA’s March Hogs and Pigs Report. That’s the bad news.

The good news, of course, is that we will get a fresh count of pig numbers this Friday, 26 June, when USDA’s June Hogs and Pigs report is released. Next week’s Market Preview will address the key numbers and their implications for hog markets over the next 12 months.

But what’s going on now?

Figure 1 shows actual slaughter levels and the levels that I had forecast coming out of the March Hogs and Pigs Report. Those numbers have not matched up well on a weekly basis all the way back to early March, but they had, on average, matched almost perfectly until the week ending 9 May. That week was the expected slaughter week for the last of USDA’s 120-179-lb. weight category. Since the week of 16 May, slaughter has exceeded my expected level by 3.1 per cent. That number differs from the 1.6 per cent reported in last week’s column due to a couple of factors:

  • This number does not include the weeks ending 2 May and 9 May, and
  • The addition of last week when slaughter exceeded my expected level by 2.4 per cent.

I derived my forecasts back in March from last year’s slaughter levels, the percentage change in various weight-class inventories in the March Hogs and Pigs Report and my expectation of lower imports from Canada. The first of those is a hard and fast number and the last has played out almost exactly as I had expected. Therefore, I have to conclude that USDA’s 60-119-lb. category on 1 March was somewhat undercounted.

It is possible that we backed up a few hogs in the early stages of the H1N1 crisis, but slaughter weight data belie that idea. Figure 2 shows average carcass weight data for the animals reported as part of USDA’s mandatory price reporting (MPR) system for barrows and gilts. This data series includes only “top” butcher hogs since sows are excluded and plants that slaughter lightweight pigs are not covered by the MPR system. So, these weights are higher than USDA’s barrows and gilts weights (which are always two weeks behind and include light hogs) and are about the same as USDA’s hog weights, which include sows and light hogs and also run two weeks in arrears.

It is clear that average barrow and gilt weights have not responded to lower hog prices or rising feed costs, even with higher slaughter numbers. About the only reason that could be true is that there are more hogs available and packers do not want to process them at a rate sufficient to keep marketings current. And this is not at all an issue of capacity. As was reported last month in National Hog Farmer, US slaughter capacity is nearly 445,000 head/day. Recent slaughter rates have been roughly 410,000 head/day, some 8 per cent below capacity.

The issue is getting the product moved. Packers are willing to push chain speeds only as quickly as they can move product across the loading docks. Exports that by all accounts are still slow mean that more of that product must go to domestic uses and consumers are only going to buy so much even at discounted prices.

A Little Good News

The encouraging news for this week, of course, was a sharp rebound in Chicago Mercantile Exchange (CME) Lean Hogs futures prices on Friday, driven by a healthy increase in the cutout value on Thursday and some technical response to what appears to be an over-sold market. The July contract managed to move above the 10-day average – one of the first positive technical developments in several weeks.

Lower futures prices for both corn and soybean meal helped the outlook as well. The main driver there was the “better late than never” arrival of good crop growing conditions in much of the Midwest. And the forecast for this week is for more of the same – low 90s temperatures and plenty of humidity in Iowa and similar conditions elsewhere. Those are good for neither people nor pigs, but couldn’t be much better for corn and soybeans!

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