CME: Hog Slaughter Lower Than a Year Ago

US - Livestock futures ended the week on a high note as most hog and cattle contracts continued to build on earlier gains, write Steve Meyer and Len Steiner.
calendar icon 2 August 2010
clock icon 4 minute read

Sharply higher grain prices are clearly negative for producer profitability going forward and higher cattle and hog prices reflect the higher costs of doing business later this year and in 2011. 2011 corn futures are above $4 per bushel despite expectations of good yields this fall. The rise in corn prices, they are up by more than 60 cents or 18 per cent since late June, has in part resulted from a reassessment of current corn stocks. Both the supply and quality of corn appears to be worse than previously thought.

More recently grain markets have been buoyed by reports of wheat crop troubles in Russia and other former Soviet countries. As it was the case with Australia a couple of years ago, it takes time for the full extent of the damage to become known and we are seeing reports of even lower production prospects for wheat, barley and other grains in that part of the world. December Chicago wheat prices were up by more 34 cents per bushel on Friday and for the week they gained some 74 cents per bushel. For the week, Decmber corn and November soybeans were up 24 and 26 cents, respectively.

In addition to a more bullish outlook for grain prices later this year and in 2011, livestock futures have also benefited from strong grains in product markets. Pork continues to lead the parade, with very strong prices for a number of items. Pork bellies hit $135 /cwt this week, a new all time record. August belly futures on Friday were $103.5 /cwt, which is not all that unusual as basis levels tend to be the highest during this time of year. Pork supplies are very tight despite relatively high carcass weights for this time of year. Hog slaughter for the week was reported to be 7.3 per cent lower than the previous year and even with the gains in carcass weights, total production for the week was down 6.8 per cent. Note that carcass weights for the last two weeks are considered provisional and we will see if USDA goes backs and revises them lower, which was the case earlier in July.

On the one hand, hot and humid weather should contribute to lower weights especially as temperatures in key production areas are higher than a year ago. However, we suspect that very strong pork prices have encouraged producers to be very aggressive in feeding animals and maybe hold them on feed a bit longer. After all, hog slaughter since 1 June (latest Hogs and Pigs report date) has been on average 4.6 per cent lower than a year ago. Based on the USDA hogs and pigs inventory numbers, slaughter for the period in question should have been around 3 per cent lower than the previous year. Cattle weights, on the other hand remain well below year ago levels and also below the five year average. It is understandable that with more cows in the slaughter mix weights will be lower but the magnitude of the decline points to a more dramatic change in both the cattle being placed on feed as well as feed rations and rate of weight gains.

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