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CME: Hog and Steer By-Product (Drop) Values

by 5m Editor
3 December 2010, at 12:22am

US - Our last report focused on the impact that higher prices for beef at the wholesale level are having on live cattle prices, write Steve Meyer and Len Steiner.

But that is only part of the story since muscle cuts and grinding products make up only a portion of the live animal sold in the open market. By-product values, also known as drop values, account for a good portion of the value that packers derive from slaughtering livestock. Hides, offal, bones and all other such products are sold in the domestic and export markets. The latter is particularly important since particular items (hearts, livers, etc.) trade at a premium in world markets. Hide values also are important. The near death experience of the US auto industry in 2008 caused a sharp decline in demand for leather, which in turn directly impacted the value of cattle going to slaughter. Now that the auto industry has recovered, hide prices also have bounced back and so far in 2010, average hide prices are up some 80 per cent compared to 2009 levels.

The charts below show the ten year history in byproduct values for steers and hogs as well as the ratio of byproduct values to the value of the live animal.



In the case of hogs, we calculated an implied live hog price value based on the lean hog carcass IA/MN price and a 74 per cent yield. Live steer byproduct values are currently reported at $12.0/cwt., $2.4/cwt or 25 per cent higher than the comparable week a year ago. Live steer prices (USDA reported 5-day moving average) currently are trading some $17.6/cwt or 21.3 per cent higher than a year ago. But while by-product values for steer are currently trading near all time record highs, keep in mind that overall steer values are near record highs as well. Indeed, steer by-product values now account for about 12 per cent of the live steer prices, about the same as they were 10 years ago.

Hog by-product values also have trended higher although they remain below the all time records established in the summer of 2008. For the week ending 26 November, the pork by-product value was quoted at $4.58/cwt, 6 cents or 1.3 per cent lower than the comparable week a year ago. While byproduct values in steer have contributed about 1/6th of the overall gain in live steer prices, drop values in hogs have offered little help to the overall hog price. This helps explain to a certain extend why hog values have not appreciated as much even though prices for specific pork cuts remain well above year ago levels. The lack of gains in pork drop values will remain a concern for the pork complex going forward. Exports are clearly an issue as shipments of pork variety meats in period January - September were slightly lower than a year ago. Beef variety meat exports in the same time frame were up 15 per cent from 2009 levels.