CME: Early-season Rally for Pork Values Continued

US - The huge early-season rally for pork values continued on Wednesday with yet another record high for USDA’s estimated cutout value, write Steve Meyer and Len Steiner.
calendar icon 14 March 2014
clock icon 4 minute read

The record of $111.33 set last June was initially eclipsed on Friday and has been raised by nearly $9/cwt since then. Wednesday’s most recent record was $120.60. The weighted average base price for negotiated hogs on Wednesday afternoon was quoted at $110.86, also a record.

That value implies a net price that includes carcass merit premiums of roughly $112 to $113/cwt. Rapidly rising Lean Hog futures prices caught their breath a bit on Wednesday with April and May prices actually falling by $1.175 and $0.15/cwt., respectively.

June and July were higher but Wednesday’s gains for those two contracts were only $0.375 and $0.05/cwt., respectively. As of Wednesday’s close, June Lean Hogs have gained $13.10 (10.7 per cent) since the end of February.

The record-high beef prices of January and now record-high pork values — with more records possible as PEDv losses exert more impacts on hog supplies this summer — point to a golden opportunity for chicken.

And the opportunity becomes even more lustrous when one considers the species’ short reproduction cycle. From setting an egg to produce a breeder hen to having chicks from that hen ready to harvest takes about eight months so this industry can respond to opportunity quickly.

US chicken companies began gearing up last summer in anticipation of a good corn crop. The breeder flock had declined by about 15 per cent from early 2008 to November 2012 when it numbered just over 49 million.

The flock grew slowly in the first half of 2013 as companies capitalized to some degree on the opportunity to sell fertilized breeder eggs to Mexican firms that had been hit hard by avian influenza. But the flock began to grow by a rate of 4-5 per cent, year-on-year, in August and has grown steadily since then with February’s rate remaining at 3.3 per cent versus one year ago.

The larger breeder flock has not yet, however, been reflected in significant increases in output. Egg sets (ie. the number of eggs placed in incubators) grew by 3.3 per cent during the second half of 2012 leading us and most other observers to think that the expansion was off and running.

But chick placements fell short of the setting rate by 1.2 per cent during that period and has continued to fall below it thus far in 2013. As can be seen in the chart at bottom right, the broiler chick hatch-placement rate trended steadily lower last fall and has touched 81 per cent on two occasions this year.

Industry sources tell us that at least one major genetic line is encountering chick liveability problems that at present are limiting the number of birds available to be placed in grow-out buildings.

YTD 2014 chick placements have exceeded those of 2013 by just 0.2 per cent — a shockingly low rate for a business that is facing a tremendous competitive opportunity. The anemic increase in placements has led to slight YTD declines in both broiler slaughter and production based on weekly data.

The other parts of this picture are likely financial. First, higher and higher soybean meal prices have offset to a great degree the positive cost impacts of lower corn prices. Second, chicken demand appeared a bit soft in January as the sector’s real per capita expenditures fell 8.5 per cent short of their January 2013 level.

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