This is beginning to sound like a broken record, but this was another tough week for cash hogs and hog futures. Figure 1 shows the steady downtrend dating back to last March and the negative pressure on February futures that the cash market has wrought over the past three weeks. The gap between Feb futures and the Chicago Mercantile Exchange (CME) Lean Hogs Index is now near $1.00, so the degree of pressure will lessen a bit. Still, lower cash markets is going to mean continued pressure on Lean Hogs futures.
While the concern for some time has focused on demand, trouble last week and this, it appears, can be placed squarely on supply. A quick perusal of the North American Pork Industry data table shows U.S. pork slaughter up 5.7% from one year ago and hog weights up another 1.8%. U.S. pork production from the week that ended Jan. 14 was 6.4% higher than last year. Those data always lag one week in the table. Canadian production was down fractionally, but the Canadian-American total was still over 5% larger than in 2005.
Cutout values down 19% and carcass values 22% lower are really very much in line with that kind of supply increase. Today's very inelastic hog demand causes prices to move more than they once did when supply changes. I regularly use a multiplier of 4, which fits pretty well with recent data. Those data support the idea that hog demand will end 2005 at about the same level that it began the year.
Pork demand, on the other hand, still appears soft. Remember that the factors that determine pork demand are consumer tastes and preferences, income (more accurately, expenditure) levels and the prices of other goods. None of those factors appear positive for pork at the present time. The decline of high-protein dieters, some concerns about the U.S. economy (underscored by the massive cutbacks announced last year by Ford Motor Company), and very cheap chicken, are all a drain on pork demand. Strong beef prices help, but they can't overcome the added effects of the other three big drivers.
"Stupidity" has been defined as doing the same thing over and over, but expecting different results. Until one of these factors changes, hog prices will not get better. I'm sure all of you needed a Ph.D. economist to tell you that!
I'm still most concerned about demand, but the current supply situation is definitely burdensome and beef supplies appear to be growing, too. Last week's Cattle on Feed Report showed feedlot inventories above 11.8 million head (4.5% larger than last year) and record-large December feedlot placements (1.9 million head).
A portion of those large numbers is due to very dry conditions in much of the traditional wheat pasture areas of Kansas, Oklahoma and Texas. However, low feed costs and attractive live cattle futures will sometimes cause feeder cattle to come out of the woodwork. The calculated average placement weight for December was 677 lb., 11 lb. less than last year, but only 1 lb. less than in 2003 and 4 lb. less than the five-year average. Therefore, these placements should reach market weight quicker than last year's December placements, but about "normal" relative to history (assuming normal weather, etc.). Canadian-American beef supplies this summer and fall will be well below the record levels of 2003, but substantially larger (4-6%) than one year ago.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com