As the second quarter of 2013 comes to a close, pork demand at the wholesale level has marked significant improvement and provided much needed margins for pork production operations.  Although wholesale prices were expected to improve seasonally in June, prices have increased significantly over year-ago values in all pork primals with the exception of loins and spareribs, increasing the composite cutout value by nearly 15% compared to June 2012.  The increase in pork belly prices has been nothing short of phenomenal.  Belly primal value in late June equated to $58.07/head compared to $39.04/head a year ago, adding $19.03/head to the wholesale value of pork carcasses, year over year.

Live hog prices have rallied through late June, bringing $214/head and improving margins to $20 to $30/head – the first positive margins for open market hogs in 2013.  Costs remain very high at $185 to $195/head, and most likely will not improve much until a new corn crop is in the bin.

Pork Supply Outlook– The quarterly USDA Hogs and Pigs report will be released on Friday, June 28.  I expect it to show a small increase in the breeding herd over a year ago, in spite of high feed costs and negative margins from August 2012 to May 2013.  The impact of porcine epidemic diarrhea (PED) virus on pork supply is unclear.  The disease has spread rapidly and continues to be a concern with new outbreaks every week, causing high mortality rates among very young pigs.  The ability to contain the spread of PED virus in the coming weeks will determine its impact on supply, which will begin to show up in late November. 

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Keep an Eye on Chicken– The broiler industry is also worth watching as they have expanded rapidly in response to higher prices recently.  April chicken production was up 7% over the prior year and will most likely continue to rise as anticipated broiler prices remain high.

Corn Outlook– Corn supply through new harvest remains the biggest concern that livestock producers face.  Use of the current supply has increase recently with higher poultry numbers and as ethanol margins have improved.  The harvest in the Upper Midwest will be later this year than last – probably later than most years – which will increase the need to ration the 2012 corn crop.  Current corn prices in southern Minnesota are $6.84/bu. It remains to be seen what it will take to ration remaining corn supplies as feed and ethanol demands increase. Basis management will also be challenging as hedgers try to manage margins with a current basis of $1.03.  Corn basis will likely continue to widen, particularly after the July contract ends.

Overall, it is great to see strong demand for pork as evidenced by high cutout values. Pork export data lags, but it seems clear that domestic demand is strong and that is very positive to the industry in the long-term.  This rally has also provided additional opportunities to hedge for some decent margins.

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