CME: Price Slump Continues to Pressure Lean Hog Futures

US - Lean hog futures continue to be pressured lower by slumping wholesale pork prices and a realisation that higher hog numbers and heavier weights will keep the market well supplied into the spring, write Steve Meyer and Len Steiner.
calendar icon 8 January 2015
clock icon 4 minute read

Hog slaughter on 5 January was particularly large at 437,000 head. This is to be expected given the disruptions caused by the holiday but it is also an indication that daily runs will start to normalise in January and consistently run above year ago levels. We could very well see slaughter for this week above 2.2 million head, which would be significantly higher than the light kills of a year ago (up about eight per cent year-on-year) but in line with the weekly slaughter in 2013 and 2012.

The difference this year is that not only will weekly slaughter approach the levels seen prior to the outbreak of PEDv but the hogs coming to market are significantly heavier. Based on the USDA MPR data, the five working day average of hog carcass weights (to 2 January) was 216.7 pounds, 1.3 per cent heavier than a year ago and about four per cent heavier than the first week of 2013. So far the pork cutout has held up above year ago levels, in part because of some retail post holiday items (loins, butts).

There are two pork categories that so far have shown little upward momentum and they will be critical for the hog market as we go into the spring. Ham prices remain particularly weak and this has contributed to the overall weakness in the pork market. The benchmark 23-27# Bone-in ham price on 5 January was quoted at $60.99 per cwt, 15 per cent lower than a year ago.

The decline in ham values, which were running as high as $140 per cwt in early October, certainly has taken a lot of the sizzle out of the ham market. It is not unusual for ham prices to decline sharply after Christmas and in a way, the current market is in line with what we normally see. The authors think the decline has been a bit larger than usual because record high fall prices caused end users to change some of their purchasing plans. Also, processors were stuck with high priced inventories going into the holidays and it take a bit for the high priced meat to move through the system.

For now, the weakness in ham prices has been a clear negative but it is also likely a short term event. Easter purchases are around the corner and for many end-users, current prices represent good value. For futures market participants, it is worth considering whether the recent slump in pork prices represents a short-term event forced by seasonality and the residual impact of record prices in the fall, or if there has been a dramatic shift in the demand curve for pork overall. The authors tend to favour the first point although poor export sales certainly have impacted the demand picture overall.

The sharp spike in the value of the US dollar is particularly negative for US pork exports, especially in the context of a weakening Euro. Pork prices in Europe have declined sharply following the Russian ban and the weaker Euro is making EU pork much more competitive in the global market.

Brazil and Canada also are trying to capitalise on their weaker currencies to move more pork. Pork belly prices also remain very weak. The authors expect this to be a focus of food-service operators and retailers particularly in Q2. For now, however, the weakness continues to be a drag for the overall cut-out.

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