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CME: FI Hog Slaughter Expected to Be Lower

by 5m Editor
24 August 2010, at 12:40am

US - USDA’s estimated cutout value for 51-52 per cent lean hog carcasses set a new weekly average record last week at $93.85/cwt, write Steve Meyer and Len Steiner.

That broke the previous record of $93.75/cwt set the week of 13 August 2008 and highlights the current tight supply and demand conditions in pork markets.

FI hog slaughter was expected to be lower than last year this summer based on data from the June Hogs and Pigs report but the year-on-year decline has exceeded levels suggested by the report ever since 1 June and has become significant over the past few weeks. Actual slaughter since 1 June has been 2.4 per cent below our forecasts based on the 1 June inventory numbers. That puts cumulative slaughter during the period 5.3 per cent below last year. And slaughter runs in August have been even smaller — falling short of 2009 levels by 6.3 per cent, 8.2 per cent and 7.1 per cent.

Why the short numbers? There are two possibilities, both of which are likely true to some degree. First, there may well be fewer hogs than USDA estimated. It is hard to imagine USDA’s estimate of the 1 June 60-119 pound inventories (-5.4 per cent from 2009) being too high but the actual data suggest it may have been. The shortfall of pigs in this weight category could be tied to some serious PRRS (porcine respiratory and reproductive syndrome) losses last spring or, perhaps, the negative impact mold- and toxin-tainted corn fed to breeding animals last fall may have had on farrowing rates or litter size. Breeding animals are particularly sensitive to these toxins and some received the poor quality corn before the extent of the quality problems were recognised.

But the better explanation may be the combination of hot weather and slack finishing space. Temperatures have been much higher in August in many hog producing areas. Pigs, with their lack of sweat glands and thus limited ability to regulate body temperature, tend to eat less when high temperatures hit and that causes daily gains to dip. In the pork industry of the past 15 or so years, these slower gains meant lighter market hogs since buildings were sized so that pigs had to be sold on schedule. The supply reductions of 2008 and 2009 have left some slack space, though, allowing producers to feed slower-growing pigs a bit longer in order to maintain market weights and take advantage of $80-plus prices. The steady market weights and falling slaughter totals of the past 4 weeks support this theory.

The down side, of course, is that if the “missing“ pigs are still out there they will eventually find their way to market. If this theory is correct, look for sharply higher slaughter totals in October and November — assuming that this year’s corn crop is of better quality and the fall temperatures are near normal.

The run-up in cutout values and near-record byproduct values have led to excellent packer margins. In fact, if last week’s actual by-product value (we won’t know that until later this week) is the same as the week before, last week’s estimated gross packer margin will be just over $44/head, the second highest ever. The highest margin ever occurred in December 1998 when hog prices fell to record lows.

The interesting thing about this summer, though, is that packers are making good money while producers are doing the same. The chart below compares weekly hog prices (read on the right-hand axis) to the 4-week average of weekly estimated gross packer margins. We use the 4-week average just to smooth the data as the raw weekly data is pretty noisy. Notice that these were very negatively correlated from ‘92 through ‘03 but have become very positively correlated since then. Packers now pay more when they have margin and pay less when they don’t. We don’t expect producers and packers to hold hands and sing Kum-By-Yah quite yet but this correlations does make for much better relationships.