The big jump in Lean Hog Futures prices seen this spring will moderate by late summer as retailers work to firm up margins.
But those futures markets will still offer pork producers relatively handsome profits for 2010 and 2011, says Chris Hurt, Purdue University agricultural economist.
“When retailers get back to raising pork prices, I think you will see more realistic futures prices. Right now, the retail price of pork has stayed low, consumers are buying a lot of it and so it feels like demand is strong,” he says.
Retailers resist changing prices frequently, preferring to keep prices stable for consumers.
But as hog prices on both the cash and futures markets peak by mid-May, expect retailers to adjust prices upward through summer, Hurt explains.
For the first quarter of 2010, retail pork prices in the United States averaged $2.90/lb., whereas, a year ago, first quarter retail pork prices averaged $2.97/lb.
Hog prices the first quarter of 2010 averaged $50.60/cwt. live weight, compared with $42.11/cwt. for the first quarter 2009. “So we had over $8/cwt. higher hog prices in 2010, and retailers were selling the pork at a cheaper price, cutting their margins,” Hurt points out.
“This is a trend that you don't see very often. The retail margin for pork cuts in the first quarter of 2010 was $1.62/lb., and in the first quarter of 2009, it was $1.85/lb., so retailers took a 23-cent-per-pound cut in margin - something that is not going to continue,” he predicts.
As retail pork prices increase, the pork industry will “really get the feeling for what the true demand for pork is.”
Retailer prices will soon rise to reflect lower per capita supplies available to consumers including 5% less pork, 2-3% less beef and 5% less turkey. The confounder is broilers. Chicken production will be up about 4%, providing stiff competition for the other meat sectors, Hurt comments.
And as retail prices surge higher, “expect to see a cutback in the quantity of pork that consumers want, given the fact that unemployment is still high. There is clearly emerging a better feel about the economy, but the cautious consumer is still out there. Consumers may not be ready to throw the finest steaks and chops on the grill; they may still be looking for pork steak this summer,” he says.
Hog prices will survive the drop in demand, Hurt predicts. Based on futures and a five-year running average basis, he offers these projections:
Second quarter 2010 prices to average $61/cwt. on a live weight basis and $82/cwt. for Lean Hog futures;
Third quarter 2010 prices to average $62-63/cwt. on a live basis and $79/cwt. for Lean Hog futures;
Fourth quarter 2010 prices to average $52/cwt. live and $70/cwt. on the futures market;
First quarter 2011 prices to average $51/cwt. live and $69/cwt. for hog futures.
Hurt estimates profits of $22.50 per head for 2010 and $14.25 for 2011. That compares to average losses per head of $16.90 in 2008 and $24.50 in 2009.
“So those 2010 and 2011 profit numbers just about offset the 2008 and 2009 losses,” he suggests. “Again, those estimates are futures-derived, so it would suggest that a producer has to put his/her own budget together (to see how their costs stack up against the estimated returns), but that is what the market would offer you right now in early May - and that's pretty neat.”