CME: Continued Decline in Number of Hogs Sold

US - Dow Jones released today the results of its prereport survey of analysts regarding USDA’s upcoming Crop Production report, write Steve Meyer and Len Steiner.
calendar icon 11 August 2010
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The report, as well as the associated World Agricultural Supply and Demand Estimates from the World Ag Outlook Board, will be released Thursday morning at 8:30 EDT. AS we hve pointed out in recent DLR editions, August will mark the first time this year that USDA”s yield estimate is based on “objective data” or actual measurements such as ear counts, ear length, kernel rows, etc. of this year’s crop. Prior yield forecasts have been based on long-term trends with some subjective adjustments for planting and growing conditions.

Analysts, on average, do not expect any major changes from USDA’s July forecasts but every average is HIGHER than the July number. Those slightly larger expected yields and output levels seem to have brought new crop corn and soybean futures back to some semblance of normalcy after last week’s wheat-induced hysteria. That last work is probably a bit strong but anyone who looks back at the daily data in two years and does not recall the incident will wonder what drove that “outlier” day in wheat and corn.

The Livestock Mandatory Reporting Act of 1999 — the act that created the mandatory price reporting system for fed cattle, cull cows, cull bulls, wholesale beef, barrows and gilts, sows, boars, sheep and wholesale lamb — has been re-authorised by the full Senate and the House Agricultural Committee. Approval by the full House of Representatives is expected before the Labor Day recess. The original act contained a 5-year sunset provision but reauthorisation in 2005 was held up by some upper-Midwest Senators who felt the system was not providing accurate information. Whatever the perceived problems in 2005, they do not seem to have caused any significant difficulties in 2010 as this process has gone quite smoothly.

The most significant changes in this year’s reauthorisation are provisions to make the reporting of wholesale pork cut volumes and prices mandatory and to gather and publish weekly data on pork exports. Both of those items were features of the 1995 bill for BEEF but were not agreed upon by pork producers and packers. Wholesale cut price reporting was viewed as too complicated and export reporting was feared, at that time, to provide more information for key export market competitors (we were #3 behind the EU and Canada then) than it would for US packers and producers. Viewpoints and market conditions have changed and both are included in this year’s reauthorisation.

A key driver behind the interest in wholesale price reporting has been the continued decline in the number of hogs sold through negotiated trades. That number hit another all-time low the week of 9 July at only 56,358 head or just 3.6 per cent of the week’s 1.584 million head of barrow and gilts purchased by packers large enough to be required to report to USDA. This decline has caused some concern about the accuracy and efficiency of the price discovery process and some producers and packers are looking at alternative ways to establish the value of the hogs they trade.

A reasonable alternative would be to tie the pig value to the cutout value — the weighted average value of the individual wholesale cuts of the pig. Changes in carcass values would be passed directly on as changes in hog values. That is even appealing to an economist!

The trouble is that USDA’s current cutout value is based on a miniscule portion of wholesale pork production (chart below). There are several reasons for this. First, high proportions of some cuts (especially bellies and hams) are never traded but are processed by the companies that slaughter the pigs. Second, high proportions of the cuts that do trade are themselves formulated from this thin spot market. Third, reporting is voluntary so many trades are never reported. Mandatory reporting solves only problem 3 — but may be enough to significantly thicken this market and its reporting and provide a more dependable and, perhaps, accurate valuation for hog carcasses.

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