Continued high hog slaughter, a major rally in the pork cutout value and gross packer margins at their highest level since February 1999 – and all of this is happening in July, no less! Graphs of all three appear in Figures 1 through 3 and they explain the recent rally in cash hog prices.

We saw the beginnings of the rally last week when weekly average cash hog prices rose $4 to $6 to get back near $75 on a carcass weight basis. Thursday’s Prior Day National Negotiated Net Price (for hogs slaughtered on Wednesday) was $0.46 higher at $79.84. But the National Negotiated Base purchase price on Thursday afternoon was $1.11 higher at $80.49. The latter is a better measure of the current market since it represents hogs bought Thursday for slaughter over the next few days. The prior-day slaughter data applies to hogs slaughtered Wednesday and purchased in the past few days. So, the forward-looking purchase data always “leads” the backward-looking slaughter data.

Higher quantity and higher wholesale level prices spell higher wholesale demand. But that is apparently not being driven by U.S. consumer demand at present. In fact, the very favorable U.S. consumer-level demand news that we had through April turned quite sour in May. The University of Missouri’s year-to-date demand index went from +3.5 to -1.9 in that one-month period. The reason? Much lower domestic availability, which equals domestic consumption and nominal retail prices, that did not rise fast enough to keep up with inflation. Lower consumption and lower price equals lower demand any way you cut it.

But there is a good side to this story. The reason for lower domestic availability, of course, was robust exports and those helped wholesale pork and hog values. In addition, retail prices tend to lag changes in availability/consumption as retailers try to “hold the line” on prices to avoid angry customers when prices are rising and maintain profit margins when prices are falling. It is very likely that retail prices will increase and make this domestic demand picture better, but it may take a month or two.

The last observation in Figure 3 is for the week of July 12. The spike in gross packer margins is the result of higher cutout values and record-high by-product values. Those values reached $23.14/head that week compared to $17.51/head last year and $13.01/head the same week in 2006. The margin spike provided the fuel for the ongoing cash hog price rally and underscores the propensity of packers to bid away margins in the pursuit of more hogs. That action also suggests a pretty efficient market system.

So what lies ahead? It’s possible that this rally will take out the May highs on most cash hog price charts. Wednesday’s national net price of $79.84 is within $0.50 of those highs and this rally does not appear over. The strength of that May rally led me to believe that our seasonal highs were already in for 2008, but this crazy market will probably prove me wrong again. Can it hold up well enough in the long run to make those futures prices correct? Perhaps, but they still look attractive enough to warrant pricing a good portion of your output through December or February.

Good Feed Cost News – Finally!
And the news gets better. Chicago Mercantile Exchange (CME) Group December corn futures closed Thursday at $5.92/bu. compared to $6.50 last Thursday. December soybean meal closed at $359.80/ton on Thursday vs. $389.90 one week early. My feed cost index has declined nearly $50/ton in just over three weeks. It’s hard to fathom being excited about buying corn and soybean meal at these levels, but this decline in the grain complex may be as good a chance as we will get to keep costs in the $80s on a carcass weight basis for the coming year. The rate of decline is slowing, so be ready to act when it appears a bottom has been reached.




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com