CME: More Aggressive Bids for Hogs, Lower Margins

5 October 2012, at 1:52pm

US - Our mentions of Statistics Canada’s elimination of its October and April Hog Statistics report prompted a number of email concerning the status of U.S. agricultural statistics reports, write Steve Meyer and Len Steiner.

There is well-founded concern that budget pressures will eventually impact the amount of information provided by federal agencies, especially in light of cuts made last year. Joe Prusacki, the Director of the Statistics Division at the National Agricultural Statistics Service (NASS) said “NASS has attempted to spare the major (Principal Economic Indicator) reports. There may come a time when we will be forced to look at products such as hogs and pigs, grain stocks, cattle-on-feed, crop production, etc. I hope not.“ We hope not, too. While far more concentrated than in the past, agricultural production enterprises are still generally much smaller than are the buyers of their products. Most would have far less information available to them than would their counter-parties if it were not for USDA data.

On this topic — USDA will hold a Data Users’ Meeting on October 22 at the Crowne Plaza Hotel Chicago Metro. This meeting is held annually “To update data users on recent and pending changes in the various statistical and information programs important to agriculture, and to seek comments and input on these programs.“ For full information and to register for the meeting, go to Education_and_Outreach/Meeting/index.asp.

Margins for pork and beef packers have taken very divergent paths in recent weeks. That should be no real surprise since the seasonal patterns for margins in the two sectors are quite different and the market supply situation since early August could hardly be more different. Gross margins (the value of carcass (ie. cutout) sales plus by-products less the cost of the animals only) are represented by the charts at right. Note that the last observation in the beef margin chart is for the week of September 14 since we have no grading percentage data for the past two weeks yet. Carcass revenue for beef is computed as an average of the Choice and Select cutout values weighted by their respective grading percentages.

Beef packer margins spent that first half of the year below their historic average — and some of that time FAR below those averages. They climbed to more repectable levels in June and July before taking two plunges below their long-run average levels in late summer. There is no single driver of the most recent decline from $175/head the last week of August to just $75/head the week of September 14 but the roughly $5/cwt rally in live cattle prices was the largest contributor. And there could be more challenges to come with the lower -on-year feedlot inventories in the most recent Cattle on Feed report and prospects of even lower fed cattle numbers when the 10% reductions in placements for July and August finish their feeding period in January and February. Packers will have to work hard to push selling prices higher against likely consumer resistance, especially given the availability of relatively low-prices pork.

As is normally the case at this time of year, the story is quite different for pork packers, especially given the flood of market hogs they have seen since mid-August. Note that the last observation in the pork packer chart is for last week since we do not have to wait for grading information to make our computations. The rise in packer margins is simply a case of animals costs falling faster than did revenues as supplies grew. In addition, we bumped against the sectors production capacity the first two weeks after Labor Day. Last week’s slight but significant drop in hog numbers to 2.345 million was below our estimated 5.4 day capacity of 2.355 million and the cutout value improved for the first time since August 11. The result: More aggressive bids for hogs and lower margins.