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CME: Negative Sentiment Lurks in Livestock Complex

by 5m Editor
11 June 2010, at 1:58am

US - Lean hog carcass and pork cutout values continued to drift lower on Wednesday as pork supplies appear to be more than adequate at this time, write Steve Meyer and Len Steiner.

Demand seems to be ok for the moment but it will face some challenges as end users are on the defensive and will likely go hand to mouth given the rise in volatility. The pork cutout closed at $82.94 /cwt, $0.9/cwt lower than the previous day and $2.9 /cwt lower than the week before. Pork cutout values are currently at the lowest point since 14 April but remain well above the depressed levels of a year ago. Lean hog prices have also drifted lower, reflecting in part the decline in cutout values but also the negative impact of lower equity markets and a stronger US currency.

While there is plenty of negative sentiment to go around in the livestock complex at this time, it is important to put current hog prices in context. Despite the lower prices we have seen in recent days, much of the decline is in line with the seasonal tendency for prices to drift lower from mid-May levels. The top chart above shows the daily trend in the price of the cash lean hog carcass (IA/MN wt. avg.). For all of this year, prices have been the highest we have seen for the past 10 years. Even with the current decline, prices remain on the high side of the range. At around this time in 2008, a year that saw a significant spike in hog prices during the summer months, prices in early June were hovering around $71-72 /cwt, compared to the $74.5 /cwt where they closed last night.

Hog futures, represented by the red dots in the chart above, remain optimistic that prices will hold above the 10 year range for the remainder of the year. For that to happen, however, we will need to see continued good demand not just for pork trimmings and bellies but also for hams and especially loins. Pork loin prices were instrumental in supporting the cutout in late April and May, in large part a result of increased retail activity for the Memorial Day business. The price of 1/4“ trim loins in mid May was around $1.53 per pound while it currently stands at 1.14 per pound, a 26 per cent decline. Some of the decline was expected as seasonally loin values are lower in the second part of May and into June.

However, the price decline has been about twice as large as it normally is for this time frame. One factor that will be challenging not just for loin prices but the entire pork market is the price of chicken items in the next two to three months. With grain prices on the defensive, broiler producers appear to once again be on a growth path. And they have the ability to increase production relatively quickly. Weekly chick placements were on average 2.5 per cent over year ago in April and May, an increase that will be further amplified by heavier birds coming to market.