CME: Pork Packers Pay High Prices for Hogs

by 5m Editor
6 May 2010, at 4:20am

US - Lean hog futures were mixed on Tuesday, with the nearby May contract closing at life of contract highs on strong cash hog prices, write Steve Meyer and Len Steiner.

Packers have been paying ever higher prices for hogs as wholesale pork prices remain very strong and hog supply availability is thin. The IA/MN hog carcass price on Tuesday was quoted at $87.23/cwt (USDA wt. avg.), $1.1/cwt compared to the Monday price and $36.3/cwt or 71.4 per cent higher than the previous year. Current lean hog carcass prices are the highest since 11 August 2008.

Wholesale pork prices have been very strong for much of April and that trend continues in May. Pork cutout values on 4 May were reported at $90.36/cwt, just 0.9 cents lower than the night before and the highest pork cutout value since 20 August 2008. Pork prices have been very strong due to broad price gains for many pork cuts. Indeed, the monthly average cutout value for April was reported to be $83.76/cwt, 43 per cent higher than April 2009 (based on a simple average of daily closing prices). The chart below to the right illustrates the year over year change in the price of the various pork primal.

Ham prices have seen the most significant appreciation as the April average price was pegged at $74.3/cwt, 75.7 per cent higher than the year before. The pork loin primal value also has rebounded and at $96.6/cwt it was 32.1 per cent higher than in April 2009. All other primals showed significant gains on a year ago. However, because of the relative proportion of each primal in the carcass, not all price increases contribute the same amount to the overall cutout. For instance, we estimate that the increase in ham prices has added about $8 per cwt to the cutout value, with the increase in loin prices adding another $5.9 to the cutout. Pork belly prices have also moved sharply higher, contributing $4.6 to the $25 overall increase in the value of the pork cutout. The map below illustrates the overall breakdown with the size of each box showing the overall weight of the increase by primal.

The broader point is simple. Current hog futures point to even higher hog and pork prices this summer. July and August hog futures are hovering above $87/cwt, implying cutout values over the $90 mark. For that to happen, we will need continued strong gains not just in the ham market, which is currently driven by robust export sales, but also in the market for pork loins, bellies and picnics. The loin complex remains critical. At this time, higher prices for competing products, especially ground beef and chicken breasts have supported this market. Those prices will need to hold up, however, otherwise packers will need to put even more money on hams, bellies and picnics to justify the hog prices futures are indicating.