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CME: Pork Prices Hit Record High

by 5m Editor
4 August 2011, at 9:34am

US - Pork wholesale prices have climbed sharply in recent days, with prices in the last five trading days hitting new all time record highs, write Steve Meyer and Len Steiner.

This has allowed packers to continue to bid up the price of hogs coming to market with hog carcass values now also record high levels.

On Tuesday, the hog cut-out closed at $106.23/cwt, $3.68/cwt or 3.6 per cent higher than the previous week and $15.3/cwt or 16.9 per cent higher than a year ago.

The IA/MN hog price on Tuesday was quoted at $103.98, $5.36 or 5.5 per cent higher than a year ago and $19.53 or 23.4 per cent higher than the comparable period a year ago.

Cash performance has buoyed futures, with the nearby lean hog contract gaining 70 points yesterday to close at life of contract highs.

So what is driving the current pork markets and what does this imply for pork expansion later this year and in 2012?

Pork sales to China clearly have dominated the discussion and they are seen as driving the recent surge in prices. We have no way of knowing the pace of sales and the weekly pork export report could not come soon enough.

Anecdotal evidence from industry contacts indicates that pork shipments to China remain very strong and could be sustained at least through the end of August.

After that, it is unclear what the flow of Chinese orders will look like. Much will depend on pork prices in China and the ability of Chinese producers to ramp up production.

One thing to keep in mind is that while China is the largest pork producer in the world and has a hog herd of almost half a billion animals (compared to the US at around 65 million), much of it is small-scale production. As a result, expansion there can take place much faster than in highly advanced and more concentrated pork industries, such as the US.

In other words, it is a lot easier for Chinese small producers to add a few pigs than it is for US operations that need to ponder the feasibility of making large scale investments.

Indeed, the hog cycle in the US 30 years ago, when there were a lot more small producers, used to by much more volatile than it is today.

Another factor driving pork prices, in our opinion, is what has happened with hog carcass weights.

Back in July we noted that one should keep an eye on hog weights given the spike in temperatures across the Midwest. In the past, the primary data source for assessing hog weights was the USDA weekly production report, which provided estimates of hog weights and production for the week.

We continue to quote this report in our weekly summary as it is still considered the official pork supply datasheet.

According to that report, hog weights for the week ending 29 July were 202 pounds per carcass, compared to 200 pounds a year ago.

However, these numbers do not jive with the daily actual hog weights reported by packers as part of the Mandatory Price Reporting system.

The chart below shows the daily weighted average hog carcass weights. These weights do not capture all hogs slaughtered but they do account for a large portion of them.

The daily report on 1 August showed that the weighted average carcass weight of the 346,810 hogs slaughtered was 198.04 pounds, compared to 200.54 pounds a year ago.

Another sign of the sharp decline in hog weights is the tight supply of fat pork trimmings in the marketplace. USDA quoted 42CL pork trim at an all time record high of 87 cents per pound, just one penny shy of the price end users paid for lean 72 CL pork trim. Fat pork trim is currently trading at a 10-cent premium to 50CL beef.

Still think hog weights are up vs. 2010?