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CME: Declines Come as Supplies Remain Large

by 5m Editor
29 October 2010, at 12:00am

US - CME Group Lean Hogs Futures closed lower nearly across the board on Wednesday with the December 2011 contract being the only gainer closing at $74.60, up $0.20 for the day, write Steve Meyer and Len Steiner.

The December 2010 contract closed at $67.85, down $0.825. That is the lowest close for December since just before the March USDA Hogs and Pigs report launched the rally that eventually took the December contract to nearly $78 in September.

The declines come as supplies remain large and cash prices remain under pressure. Wednesday’s estimated federallyinspected (FI) slaughter was 425,000 head, down slightly from last week’s 427,000 head and 7,000 lower than one year ago. Wednesday’s kill brought the weekly total to 1.274 million, 1,000 head higher than last week but 15,000 lower than one year ago. Base purchase prices (ie. the cash price bids for “base“ or “normal“ leanness hogs) were lower in all areas yesterday afternoon with the national average dropping $1.03 from Tuesday to $61.34/cwt. carcass. Base price bids were $61.37 in the Western Cornbelt and $61.28 in the Eastern Cornbelt.

Saturday’s 234,000 head was the largest non-holiday week total since last fall. It is not unusual to run large Saturday kills in the fall as hog numbers rise and packers try to make up for lost time during the Labor Day, Thanksgiving and Christmas holidays. As can be seen in the chart below, last week’s Saturday total was not nearly as large as the normal annual peak that we usually seen the week of Thanksgiving.

Last week’s slaughter run of 2.331 million head meant that the nation’s estimated hog slaughter capacity of 432,135 head/day worked 5.39 days. It is our experience that packing capacity itself can begin to have negative impacts on prices if weekly operations of 5.4 days per week are required over a period of several weeks. Such ongoing high slaughter rates drive overtime and plant costs higher and leave packers in a clear buyers’ market for hogs and a disadvantageous position in selling pork. All of those factors contribute to lower hog bids.

The question in this situation is whether supplies are large enough to require such high capacity utilization rates over several weeks between now and Christmas. The September Hogs and Pigs report did not indicate that supplies would be that burdensome but recent performance rates have likely pulled some hog marketings forward. How long might that remain the case as we now move into November and December, the months that usually see our highest weekly slaughter totals?

Tuesday’s futures markets were impacted by rumors of swine flu or swine fever or African swine fever in either Russia or China or Chad. You can take your pick of any of those combinations since they were all in the press and the market to some degree. The only combination that fits the facts from The World Organisation for Animal Health or OIE was African swine fever in Russia and Chad with the situation in Russia obviously being the one that could have any significant market impacts. The map at right from OIE indicates that Russia, Chad and Nigeria are the only countries with ongoing ASF outbreaks at the present time. A further perusal of the OIE’s historical maps indicates that Russia has had either ongoing ASF outbreaks or clinical ASF disease events in all periods since July 2007. So, this is really nothing new and should only have market impacts if it increases substantially in magnitude.