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US Hog Margins, 19 July 2011

by 5m Editor
21 July 2011, at 9:19am

US - Margins were mixed over the past two weeks, improving in nearby Q3 and Q4, but deteriorating slightly in the first half of 2012, writes Doug Lenhart, General Manager of Genesus Inc., USA.

Overall, profit margins remain historically strong, resting above the 80th percentile of the past five years through Q1 2012, and above the 70th percentile of Q2 2012.

Hog prices have been quite firm in nearby periods, helping to explain the margin improvement through the remainder of 2011, as it appears that China has booked a substantial tonnage of US pork to quell rising domestic prices and inflationary pressures.

Hog weights are seasonally declining, which is also limiting pork production and supporting cutout prices.

USDA’s July WASDE report indicated higher corn ending stocks as expected by the market, although the increase was not as strong as analysts were forecasting given the 1 June stocks recently reported by NASS.

Meanwhile, very hot weather is moving into the heart of the Corn Belt as the crop enters pollination, which has put some risk premium back into the market. The July WASDE also confirmed lower new-crop soybean acreage and production, which is likewise supporting the soybean meal market.

With the sharp increase in hog futures over the past two weeks, many are now considering adjustments to previously flexible positions in order to take advantage of the stronger market. At the same time, added flexibility is also being considered on feed positions given the recent rally in the corn and soybean meal markets.

High Low Last 5 Year Percentile
3rd Qtr '11 $13.38 $2.96 $7.20 81.2%
4th Qtr '11 $7.06 $4.26 $2.13 81.4%
1st Qtr '12 $6.87 $2.57 $3.55 82.0%
2nd Qtr '12 $10.88 $2.51 $8.48 72.0%
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.