CME: Factors Affecting Current Pork Complex

US - Lean hog futures were higher on Tuesday, with the largest gains on the nearby October contract which was up 240 points ($2.4) compared to the previous session, write Steve Meyer and Len Steiner.
calendar icon 16 September 2010
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December gained 210 points and 2011 summer futures also posted healthy increases. A number of factors continue to be at play in the pork complex at this time:

There is less pork available. We were looking at some of the price and supply data from last week and they looked awfully familiar. We dug out a chart that we put together sometime last year. At that time, pork production levels were running well above the 2003-07 average while cutout values were quite depressed. We used the same chart and extended it through the latest data. To be consistent, we left the reference comparison to 2003/07 unchanged. The result is an inverted picture of what we experienced last year. The latest production data shows pork supplies are running about 7.6 per cent lower than the 2003/07 base while a year ago they were up about 10.4 per cent from the same base. Pork cutout values are currently running some 30 per cent above the 2003/07 base while a year ago they were down about 23 per cent. Hog slaughter supplies are down by more than what the 1 June Quarterly Hogs and Pigs report implied. USDA will publish its quarterly hog inventory numbers on 24 September and we will see if some of the historical numbers are adjusted to reflect actual slaughter as well as get an indication on what producers are saying about future output.

Sow numbers are dwindling. There is really no surprise here given the relatively good profits futures are indicating into next year. There is little reason at this time to send sows to slaughter and the weekly sow slaughter data shows a 20 per cent decline from year ago levels. But a reduction in slaughter does not necessarily imply herd rebuilding and we do not have access to good data showing the number of gilts going to market. High corn prices remain a concern for future rebuilding however, especially with corn for 2011 now above $5/bushel.

Strength in some items has boosted the overall cutout value. Pork bellies are an especially big contributor in this regard. Belly prices last night closed at $1.55 per lb., a new all time high. The pork cutout is currently up $33.39 /cwt from year ago levels and about half of the increase is due to the higher price of pork bellies. There are virtually no bellies available in the spot market (lower slaughter, contracted supplies, empty freezers) leading to exorbitant prices in the spot market.

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