CME: Will Supplies Fall or Will Demand Increase?

US - The remarkable counter-seasonal run for pork cutout values continued last week with a gain of $4.49/cwt. carcass to reach $67.25/cwt carcass, the highest level of 2009, write Steve Meyer and Len Steiner in their Daily Livestock Report for 14 December.
calendar icon 15 December 2009
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That level is $14.19/cwt higher than the fall low of $53.06 the week of October 10 and nearly $15/cwt higher than the year’s lowest weekly observation, $52.31/cwt the week of 22 August. The cutout value gains of the past three weeks have pushed cash hog prices well clear of last year’s levels and resulted in last week’s weighted average negotiated net price (which includes leanness premiums) being above the ‘03-’07 average for the first time since the week of 16 January.

It sounds almost absurd that we would talk about the annual low in August and the annual high in December when it is far more the norm to see those just the opposite. But then, nothing has been “normal” about 2009. About everyone in the pork business will bid the year “Good riddance!!!” come 31 December.

The cutout value increase has been helped by virtually every pork cut since October. The biggest driver by far was hams, whose composite value gained $30.82/cwt over that time period. Ham price usually peak in late summer and decline through the end of the year as supplies grow due to higher hog slaughter. Holiday ham demand usually keeps prices relatively stable until early December when the normal pattern is closely akin to falling off a steep cliff. Not so this year. Ham prices rose steadily in October, saw an early November dip of nearly $8 but have now gained $15/cwt the past two weeks.

Every other pork cut contributed to the rally as well. The 10 October through 12 December increase for spareribs was $18/cwt while butts gained $12.32 and picnics gained $13.43. The smallest contributors among the whole muscle cuts were loins (+$7.25 ) and bellies (+$4.95). Prices for 42 per cent CL (CL stands for chemical lean) and 72 per cent CL trimmings also increased by $3.94/cwt and $14.69/cwt during that time period. To say the least, it has been a good season — FINALLY — for pork sellers.

And the rally appears to have some legs into the future. This long-awaited increase in pork and hog prices has been a major contributor to the concurrent rally in CME Group Lean Hog futures. December LH futures have gained roughly $16/cwt since October while June 2010 LH futures have gained over $18. The futures rally is providing some outstanding pricing opportunities at the present time. The green line in the chart below represents the weekly average, futures-implied Lean Hogs Index for each week of 2010 based on Monday’s closing futures prices. As you can see, these implied cash prices (the CME LH Index is comprised of the net prices of pigs sold through negotiated trades and pigs priced with formulas tied to the hog or pork market) are above the ‘03-’07 average price for every week of 2010 and, of course, are far above the price levels we have seen in 2009. They even exceed the price levels of 2008 for all but 11 weeks and compare rather favorably to the forecasted average cost of production of $68.88/cwt. based on Monday’s closing corn and soybean meal prices and Iowa State University’s estimated production parameters.

The big questions are whether supplies will fall enough or demand will increase enough to actually see these price levels — which are 30 to 50 per cent higher than this year’s prices during the summer months. The September Hogs and Pigs Report did not suggest that magnitude of supply reductions and, while the US economy and exports are both recovering, a demand increase of this magnitude would certainly be the largest ever. Both of those, of course, could happen. Consider: Who thought last March that we would sell hogs for $46/cwt carcass weight in August?

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