US Hog Margins

by 5m Editor
14 January 2011, at 11:10am

US - US Hog Margins improved since the middle of December, as hog values increased more than feed costs during the period, writes Doug Lenhart, General Manager of Genesus, USA.

All three markets, Corn - Soybeans - Hogs, were higher heading to year-end with general strength in commodities to close out 2010, but strength in the hog market was a standout feature.

The quarterly hogs and pigs report from the USDA highlighted a much smaller inventory of lighter-weight hogs than what the market was anticipating. The total hogs and pigs inventory was pegged at 64.325 million head, 0.9 per cent lower than a year ago, but in the individual weight classes, hogs weighing 50-119 pounds were reported down 1.6 per cent from a year ago while the lightest weight category of hogs weighing less than 50 pounds was reported down 0.75 per cent from a year ago. Both figures were well below pre-report expectations, reflecting lower Sep-Nov farrowings. Both Dec-Feb and March-May farrowing intentions were similarly below trade expectations, leading to a sharp rally in deferred hog contracts.

Corn and soybean meal prices continued moving higher due mainly to concerns over ongoing drought conditions in Argentina, with local agronomists now lowering production estimates for both the corn and soybean crops there.

Looking specifically at Hog Margins we see both sides of profitability. Nearby Q1 margins remain negative, while deferred margins in Q2 and Q3 still look attractive with Q4 at breakeven. Securing margin protection with flexible price strategies will continue allowing for improvement over time.

You can see in the first graph below there have been opportunities to complete a full hedge and lock in profit for Q1 hogs. The line represents what profit or loss would have been available to producers in the US on any given date while completing the purchase of feed and selling the lean hogs on the same day. The maximum profit potential was $7.10 if executed in mid-summer 2010 or a loss of ($7.63) if you executed during harvest. The second graph simply shows the losses that would be incurred if you had waited until the end of 2010 to place your hedge. As of 31 December 2010 your full hedge would lock in a ($2.47) loss.

The next two graphs utilize the same analysis as used above but for Q2 of 2011. This quarter has remained profitable but also provides a wide range. Maximum profit opportunity was offered in the mid-summer again at $11.65 per head. The tightest margin opportunity was during the harvest at essentially breakeven or $1.56 per head. The 31 December margin opportunity was $6.64.

Q3 has remained profitable just as Q2 has been. The high has not been as good, showing only a $6.67 opportunity, while the least amount has been $1.30. Profit opportunity on Dec 31 was $5.13.

Q4 remains at or below breakeven with a high of $0.13 a few weeks ago and a loss of ($1.53). The 31 December figure was ($0.20).

The Hog Margin calculation assumes that 73 lbs of soybean meal and 4.87 bushels of corn are required to produce 100 lean hog lbs. Additional assumed costs include $40 per cwt for other feed and non-feed expenses. Thank you to Commodity & Ingredient Hedging, LLC (CIH) for the margin data. Please visit CIH Margin Watch to subscribe to the CIH Margin Watch report.