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Pork Commentary: New Highs for CME Hogs

by 5m Editor
9 November 2010, at 8:57am

CANADA - This week's North American Pork Commentary from Jim Long.

The hog industry had some interesting developments this past week.

Our observations:

  • Lean hog futures for the last half of 2011 at the CME reached new life of contract highs. Last week August 86.55, October closed at 80.05, and December at 77. These are excellent prices for the fall months. It makes one wonder about hedging fall 2011. There could be an upside, yet on the futures for October – December but 80 cents is a lot better than the 60 cent lean prices we are getting currently. There are always more hogs seasonally in the fall.

  • The National Base Lean weights for the 4 days last week averaged 207.5 pounds the week before the average weight was 208.44. There appears to be a drop in weights, this is quite positive after we have seen several weeks of relentless weight increases. In our opinion the only way weights could be dropping is a more current inventory. Weather, grain, finishing space for hogs has not changed. Pulling weights down will support prices as it is a reflection on hog supply and will cut pork tonnage. The CME reflects this confidence with December Friday closing at 67 cents a pound, while Iowa – Minnesota was 61 cents per pound. The average bet is pricing is going up.

  • With lean hogs 61 cents per pound and USDA pork cut – outs $77.50 last week, the 16 cents per pound spread is giving excellent margins to Packers. As hog supply declines we expect this cut – out margin will allow packers to bid up hog prices quickly.

  • Last week we discussed the USA – Canada swine inventory being 2% smaller than a year ago this past quarter. This obviously means fewer hogs are coming to market for the coming months. The USDA small pig price continues to support the idea of fewer pigs coming. Cash early weans of $37.96 and cash 40 pound pigs $48.41 in the face of corn closing on $6.00 a bushel is a sure sign pig demand is overcoming margin calculations.

  • Sow slaughter has been around 62,000 a week for the last few weeks. This is up from the 55,000 we have averaged for the year. At 55,000 a week the breeding herd was holding steady. At 62,000 we expect this means liquidation. High feed prices coupled with the drop in hog prices has translated into negative margins. It takes capital and courage to be in the hog industry. Some are being challenged on these attributes and are exiting.

  • The swine profit margin challenge is putting a big break on potential expansion. Genesus is in the business of selling swine genetics. Empty sow units needing restocking we pay attention too. Before the grain price surge we had several empty units in play to get restocked. The feed price surge has put most if not all plans on hold. There is no way when you consider the biological time period to breed sows and get hogs to market that there will be anything but less hogs in 2011 compared to 2010.

  • You want to feel bad. Currently Russian hog producers are making $135 per head. That’s more than our gross revenue per head. This is what happens when you have low production and tariffs.

  • It is a good time to call your congressman and tell them the livestock industry and consumers are both being hurt by the drive up in corn prices pushed by subsidized corn ethanol production. The 45 cent volumetric ethanol excise tax credit and 54 cent ethanol import tariff are due to expire December 31. Let them expire. If the corn ethanol industry is efficient and necessary, it will survive. Of course worse fuel economy and no benefit to the environment have been proven. It is a boondoogle! There is talk to cut government spending as a legacy of midterm elections. China has made it illegal to make corn into ethanol. The insanity of burning food is morally and economically un-defendable.

Finally, we will be at Euro tier Livestock Exhibition in Hannover Germany in a week. You can find us at the CSEA booth 12B40. We look forward to seeing you there!