The US makes some mistakes but some of our best people always answer the call when the liberties of free people or people who long to be free are on the line. And thousands have paid the ultimate price for those liberties. It always deepens my gratitude and freshens my perspective to listen to words of tribute and hear the strains of Taps ringing from the walls of a grand building or echoing off the ancient trees of a hallowed cemetery. I think it will do the same for you. Please try to make time to honor these fallen heroes.

One of the interesting aspects of this spring’s big rally in hog and cattle prices is the fact that they occurred while packer margins remained quite healthy. Neither pork nor beef packers’ estimated gross margins have hit record levels but they have been among the best 10 per cent of the weeks for which I keep estimates.

One question I hear from time to time is “Just where do packers make their money?“ A definitive answer to that one depends on where you draw the line for a “packer“. Some packers are strictly “kill and cut“ operations that sell primal cuts or boxed items that are typically boneless and often vacuum packed. On the pork side, though, some packers do a great deal of value-adding in the form of curing, smoking and cooking. Generally, further processing basic primal cuts is a key profit area for packers. But estimating those “value-added“ margins is quite difficult since they vary so much from packer to packer and depend on other factors such as the presence of brands.

As can be seen above, by-product values play a very important role in the packer margin picture and have been a key factor for both pork and beef packers this year. The beef by-product value is larger than that of pork because of the much higher value of beef hides which is itself quite dependent on the world economy and exports; thus the big impact of the recession on beef by-product values.

Packers of both species have done a much better job of keeping “meat“ margins positive — beef packers since late 2007 and pork packers since mid-2009. The change for beef packers coincided with a reduction in excess capacity from the closure of Tyson’s Emporia plant. There were no major structural changes that flipped pork meat margins from negative to positive last year but they have held up well this year in the face of lower numbers. The closure of Morrell’s Sioux City plant in March has been part of that performance.

The charts below show total gross margins and hog and fed cattle prices and demonstrate an interesting change in correlation: Where once (before 2003 for hogs, before mid-2007 for cattle) the two values were negatively correlated, they are now are more POSITIVELY correlated. Strong wholesale-level demand is good for all!!