CME: Processor Margins Expected to Tighten Based on New Hog Operations

US - A measure of profitability (that is, gross margin or the live to cutout price spread) for the hog processing sector has held up above the values of the first half of the decade for most of 2016 and 2017, writes Steiner Consulting Group, DLR Division, Inc.
calendar icon 6 October 2017
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September economic returns to the industry typically improve from August, and that was the case again this year, although the degree of improvement was less than normal. As such, the comparison of profitability relative to the same month in 2016 fell below a year go for the first time this year.

The profitability calculation is based on hog prices and wholesale pork prices reported by USDA-AMS (Agriculture Marketing Service) on a daily basis, along with values for by-products such as lard, chitterlings, and organ parts. Accounting for labor, depreciation, marketing costs, etc. is not included in the calculation.

Two new hog processing plants were scheduled to start up in September that hog producers were hoping would lead to increased competition for their hogs and higher prices. One of those plants, in Michigan, now had its start date moved back into early 2018, and the other facility in Iowa, will not be operating a full shift until November. Processor margins were expected to tighten based on these new operations, but the impact appears to be minimal so far.

The preliminary estimate of Federal Inspected daily hog slaughter set a record on 4 October of 463,000 head, topping the prior record set in late October 2016 (similar harvest levels to the previous high also occurred in other recent days).

This slaughter is 5 per cent higher than a year ago, slightly more than would be expected based the number of pigs born last spring. The seasonal increase in hog slaughter during the final quarter of the year is the foundation supporting the expansion of pork processing margins in September and October.

High pork belly prices have been instrumental in supporting packer margins so far this year, but belly prices dropped below 2016 values in the last week. They may not rebound in the near future, given slaughter levels. Packer bids for hogs also may will be affected by pork belly, so packer margins may not change radically.

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