The roller coaster ride of pork packer margins abated a bit last week as my weekly calculated gross margin of $22.43/head was only $0.63/head lower than one week earlier. As you can see from Figure 1, that change represents unusual stability compared to the recent history of this important number.
Pork packers have fallen into the "get some margin and bid it away" syndrome since June. That is usually good for hog producers as it results in some very high hog bids relative to cutout values. It also provides a lot of volatility for hog prices and that, depending on one's ability to deal with rapid changes, can be the source of considerable heartburn.
This year's gross packer margins have been pretty good though. Only one week since February have gross margins been below the five-year average. And, while the ride has been wild, the average margin for this year is actually about $1/head higher than that of last year.
The volatility of margins has resulted in some weeks in which cutout values and carcass weight hog prices have been inverted. That doesn't happen often these days but it is certainly not unprecedented. Figure 2 shows the components of my gross margin calculations, and you can see that prior to 1997, negative meat margins were fairly common.
Packers Adjust Costs to Maintain Positive Margins
Did the rationalization of packing capacity of the early '90s, and the increase in packer leverage that contributed to the 1998-99 price debacle, cause this change? Perhaps. But we have seen sufficient slaughter capacity since then and have not seen any regular return to negative meat margins.
The better explanation, in my opinion, is that packer costs changed in the mid-1990s due to HAACCP (Hazard Analysis and Critical Control Point) systems and other food safety measures. Margins must cover costs in the long run, and it looks to me that the fairly discreet change in gross packer meat margins from an average of around zero to today's level of roughly $8 is more consistent with a cost increase.
Byproduct Values Surge
What is interesting is the composition of the total packer margin in recent weeks. As you can see in Figure 2, byproduct values are record high. They have stabilized somewhat since late July at between $17 and $18/head, but those levels are considerably higher than we have grown accustomed to over the past few years.
The increase in byproduct values started earlier this year as fat prices rose in response to corn and other high-energy feed ingredient prices. Recent increases have been more attributable to price increases for stomachs, snouts and other variety meat cuts. Those increases certainly suggest interest in export markets and would fit the idea that Chinese buyers have been quite active even before the rumors of large purchases drove futures markets higher. I don't have specific data to support this, but the improvement could also be the result of more shipments to Mexico, our largest pork variety meat customer.
Regardless, this is all good for U.S. producers and consumers. Adding value to byproducts adds value to pigs without forcing meat values higher. Export customers get the low-cost products they want. U.S. consumers do not have to pay more for the chops, roasts, and bacon they prefer. U.S. and Canadian producers get more for the hogs they sell. About the only downside is the increase in prices for domestic consumers of these byproducts and variety meats. I guess you can't win them all - but this seems to get close.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.