Market Preview: Cutout Values Break More Records

US - In this week's US Market Preview, published in National Hog Farmer's Weekly Preview, Steve Meyer, Ph.D. of Paragon Economics, Inc., discusses last week's record high pork cutout values.
calendar icon 31 August 2010
clock icon 5 minute read

Another week, another record-high cutout value seems like no big deal. That’s the way it goes in this wonderful pork industry. Right?

That judgment is offered with tongue planted firmly in cheek, since it is indeed a big deal when our product can command such values from a marketplace that is anything but robust! The new weekly record is $94.99/cwt., breaking the old record that stood for exactly one week (See Figure 1).

The best part of this record week is that the entire increase got bid into the price of negotiated pigs (See Figure 2), and even pushed the weighted average across all pricing methods (Figure 3) back to the same level as in late July. Truth is, this week’s strength in hog prices was more influenced by last week’s cutout value run since it created incentives for packers to slaughter more hogs and thus chase hogs a bit.

Federally-inspected hog slaughter last week totaled 2.110 million head, 1.8 per cent higher than the previous week, but 4.2 per cent lower than last year. Though still significantly short of 2009 levels, last week’s run marks the first week since 17 July in which the number of hogs slaughtered in federally-inspected plants has exceeded the level suggested by the June Hogs and Pigs Report.

The cumulative shortfall relative to the predicted level since July 17 is 276,700 head and the question is, “Are those hogs still out there or were they never there in the first place?“ As with most things, the answer will likely be some of both. But hot weather and the “bin bottoms“ of an already poor quality corn crop lead me to think we will see the vast majority of these 277,000 critters in the weeks to come.

Their market impact will be heavily dependent on how far these animals get spread out. If 50,000 head/week make market weights over the next six weeks, it would add 2 to 2.5 per cent to weekly slaughter totals. That kind of addition would make for a sharp seasonal drop-off – that is, if the pigs are actually still out there.

The normal seasonal pattern is for cash hogs to drop $10-$15/cwt. carcass from late August to October and $12-$18/cwt. carcass from late August to December. Those normal patterns would put October cash hogs in the $70-$75 range, and December hogs between $67 and $73. October and December Lean Hog futures were $74.83 and $72.58, respectively, on Friday. The average basis from the past three years would put cash hogs in Iowa-Minnesota at $71-$74 in October and just over $70 in the first half of December. The second half of December, which must be figured off the February contract, would be in the $67-$69 range. Futures appear to be accurately priced at this point relative to a normal seasonal pattern.

Competition Workshop Goes as Expected

The US Department of Agriculture/Department of Justice livestock competition workshop in Fort Collins, CO, last Friday went pretty much as expected. While the original list of panelists appeared to me to be tilted firmly in favor of the “we need government intervention“ crowd, I have to say that the actual discussion, as well as the audience statements, were more balanced than I expected.

Unfortunately, Attorney General Eric Holder and Assistant Attorney General for Antitrust Christine Varney were not around to hear much more than their own statements, as both left after the first politician-laden panel. Secretary of Agriculture Tom Vilsack did stay until lunch, but missed the afternoon sessions that included the lion’s share of comments from producers. In his defense, it should be pointed out that Vilsack attended the dedication of a new US Forest Service lab at the Rocky Mountain Research Station in Fort Collins Friday afternoon. Though I do wish he had stayed at the workshop, I do appreciate his judicious use of travel expenses.

While the session dealt primarily with cattle issues, pork producers were represented by Alden Zuhlke of Nebraska and Chris Peterson of Iowa. The two presented quite different views of hog marketing, with Zuhlke talking about the importance of marketing contracts for bringing his three sons back into his operation, and Peterson focusing on niche marketing and blaming market woes on packer concentration and packer-owned pigs. Mark Greenwood of Agstar Financial Services in Mankato, MN, brought a lender’s perspective to the discussion and made it clear that contractual relationships had been positive for his clients and had contributed to a number of new entrants to the pork industry. All expressed some concern about the thinness of negotiated hog sales.

Comments on the Grain Inspection, Packers and Stockyards Administration’s (GIPSA) proposed rule were reasonably balanced between pros and cons. The rule was not a target of the workshop (a given since GIPSA originally intended to close the comment period before the workshop!), but comments were allowed and will become a part of the comment record which GIPSA must address in crafting the final rule.

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