Market Preview: Better-than-Ever Hog Prices

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 20 April 2010
clock icon 5 minute read

How good are hog prices? About as good as they have ever been – regardless of the yardstick you use.

Figure 1 shows the weekly Lean Hogs futures chart through last week. That final observation of $86.10 – the April contract value at last Friday’s close – is the third highest ever! Third only to the last two weeks of the August 2008 contract, which expired right in the middle of the export-induced price spike that set a record for cutout values and near-record high hog prices.

Figure 2 shows weekly national negotiated net prices for 2002 through 2010. It is easy to find the 2010 line – it is the bright red one that is higher than all of the other lines for the time period. In fact, 2010 weekly prices have been the highest on record for the past six weeks and were nearly $17/cwt. higher than those of record-setting 2008.

During 2004-2008, this price increased by roughly $12/cwt. from 17 April to the “normal“ highs in May through August, among which there is no clear-cut best week. Omitting the 2008 surge would take August out of that when-is-the-maximum discussion, but there would still be no clear-cut winner from mid-May through early July. Suffice it to say that producers will probably like any of the weekly prices they see during that time span. A “normal“ rally would take cash hog prices very close to $90/cwt.

Every Lean Hog (LH) futures contract set new contract-life highs last week and, judging by the past two weeks’ extremely low slaughter runs, they may not be done. Those totals of 2.032 and 2.017 million head were the first non-holiday weeks to be lower than the 2004-2008 average since July 2009 – and slaughter that week (the one ending 17 July 2009) was only 5,000 head lower than the long-term average.

Further, the past two weeks’ totals were 86,000 and 50,000 head lower than what I expected to see, based on the March Hogs and Pigs report – a bullish report that may not have been bullish enough given these numbers. Until the week of 12 April, weekly slaughter was running higher than the forecast amounts due to, I believe, hogs that had grown slowly because of poor corn quality and cold weather. It appeared that we were catching up for the short weeks back in January and February. The March report numbers said we would see larger year-over-year declines beginning with last week, but suggested nothing of the degree actually seen in the slaughter runs of the past two weeks.

There is a possibility that producers are delaying marketings to take advantage of rapidly rising prices, but last week’s estimated average slaughter weight of 204 lb., carcass (even with the previous week and 1 lb. lower than last year) would indicate that this practice, if it’s being employed, is not widespread. There have been few, if any, times in recent years when such delaying tactics would have been possible. Pigs had to go to market at a specific time because the building was needed for the next group and there were no spare buildings. But slack capacity in hog finishing has afforded an unusual opportunity to delay marketings and allow pigs to add more pounds that are, at least in the short run, profitable. Such behavior would likely stop the price rally in its tracks, but we have not seen the tell-tale evidence of such behavior (i.e. higher market weights).

Retail Price Hike

The flip side of these good times will be higher consumer prices and, quite possibly, very negative reaction from consumers and politicians. The fact that the price increase was an inevitable result of higher costs will likely be lost when the protests start.

USDA’s monthly retail price estimates for March (Figure 3) indicated that beef and turkey prices were higher than last year, while pork and chicken prices were lower. Turkey, which has seen the largest year-on-year output cuts of any of the major meat/poultry products, led the price increase at +5.8 per cent from last month and +3.6 per cent from last year. Choice beef was 2.5 per cent higher last month, an increase that is perhaps a harbinger of some recovery in the foodservice sector. The price of All Fresh beef (which includes Select and company grade products) was higher than last month (0.1 per cent) and last year (0.8 per cent) as well. Pork and broiler prices were 0.1 per cent and 2.7 per cent lower, respectively, than one year ago.

Retail prices for beef, pork and turkey are all within 5 per cent of their all-time highs. The composite broiler price stood 9.6 per cent below its all-time high as of March. Don’t be surprised when all of these retail price records fall – perhaps even by the end of 2010. Retailers will absorb wholesale price hikes to some degree, but the fact that all species’ prices are rising will leave them few alternatives to raising retail prices to reach store-wide profit objectives.

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