CME: No Drop Credit Improvement Continues to Affect Hog Values

US - There has not been much improvement in the value of byproducts (also known as drop credits) in recent weeks and this continues to negatively impact packer bids and consequently cattle and hog values, write Steve Meyer and Len Steiner.
calendar icon 4 December 2015
clock icon 4 minute read

Export demand accounts for a significant portion of high value by-product sales and exports have been hit hard by the surge in the value of the US dollar (see chart below) as well as slow growth in number of markets.

Some analysts also have pointed to things such as fashion changes which can impact demand for products such as leather. Prices for some key by-products rose sharply last year and likely forced end users to source alternatives. Now the industry is feeling the backlash from the shifts that were put in motion a year ago.

The steer drop value at the end of November was reported at $10.90/cwt on a live basis, down $5.5/cwt (-34%) vs. the same time last year. This is the lowest steer by-product value since September 2010. Out of this $10.9/cwt, leather accounts for around $4.95 (45% of the total). The steer hide a year ago was valued at around $108.5. USDA makes the assumption of a steer weight of around 1,375 pounds so the value of the hide on a live cwt basis last year was $7.89/cwt. This year, the value of the hide is quoted at just $68.

On that same 1,375 pound steer the hide contributes about $4.95/cwt. So the drop in hide value alone was removed about $3/cwt compared to a year ago.

Tallow value is down by more than 50% compared to a year ago, in part reflecting weak exports but also the sharp decline in the value of soybean oil, the benchmark price for oils.

Head meat prices are down 67% compared to last year and tripe prices (also a key export item) are down 67%, as well. The charts to the right show not just the year/year comparison of by-product value but also how the value of the by-products compares with the overall value of live animals.

In the case of steers, by-product values have declined at a faster pacer than live steer prices, an indica- tion to us that demand for these products has been losing ground.

Hog by product values also are sharply lower compared to no just a year ago but the five year average as well. Seasonally the hog by product valuet is higher in the summer as hog slaughter declines.

This year we saw only a very modest improvement in by product values and they have continued to decline. The last USDA calculation of hog by product value pegged it at $3.31/cwt live basis, down $2.34/cwt (-41%) compared to a year ago.

Since October, hog by product values have averaged around $3.30/cwt. You have to go back to the fall of 2006 to find lower pork by-product values. Different from cattle where the hide is such a key part of the overall credit, hog credits are spread across a large number of products.

Sill, if there is one item that accounts for a significant portion of the decline in pork by product values it is blood meal. The value of the pork blood meal last year was calculated at $1.34/cwt (live basis) compared to $0.2/cwt now. This explains about half of the decline in pork by-product value.

Declines in value for export items, such as stomachs and ears explains the rest.

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