Figure 1 is a reprint of last week's price forecast table. The numbers in that one table were based on an incorrect document from Mizzou. Professors Glenn Grimes and Ron Plain provided the correct numbers after last week's North American Preview had been sent. The Missouri forecasters are still more pessimistic about this year's third quarter, but are much closer to other forecasters for the remaining three quarters of the outlook.




Note also that I have added a column that contains rough quarterly averages for Chicago Mercantile Exchange (CME) Lean Hogs futures prices as of July 11. Those futures prices are most comparable with the national net weighted average price that I forecast. The premiums included in the net price usually offset the basis for Iowa-Minnesota markets. The July 11 futures prices were near or above the top of my price forecast range through next summer.




Chicken Slippage


No one, and no company, is bulletproof. That statement came home to roost for two large chicken companies this week. Tyson announced the elimination of over 400 employee positions this week, while Pilgrim's Pride announced it would close operations at a Virginia processing plant every other Friday for the remainder of the year.




The Associated Press quoted Pilgrim Pride's VP of communications Gary Rhodes as saying, "Poultry in the United States has had a hard time this year. There's been very weak demand in the export market because of fears of avian flu."




All of those negative numbers in the "versus year ago" column of our Competing Meats Production and Price Summary bear that out. While breast meat prices have actually improved, legs and wings are still down significantly, dragging whole-bird prices down with them. Chicken companies finally responded to lower prices by dropping egg sets below year-ago levels in April and production below year-ago levels in June.




Pork's Strength


Those reductions correspond with the timing of what appears to be an improvement in pork and hog demand. Both are still lower than one year ago, but they made some significant improvement in May. June's market suggests that demand has kept strengthening.




Higher hog prices and strong packer margins are almost always positive signs for pork demand. You know about hog prices over the past six weeks. Figure 2 shows what has happened to packer margins, which are very strong for this time of year. The past six weeks have all been above the long-term average for packer gross margin. The week that ended July 1 was also above the long-term average by $7.39 or 58%.




This can only happen when product values are excellent. Since slaughter levels have been only slightly lower than expected, I conclude that pork demand has been stronger. Let's hope it stays that way.




The recent strength of margins has improved an already good year for pork packers. Not only have this year's weekly margins been generally higher than one year ago and about normal relative to the long-term average, but they have also been much less variable than last year.




The second half of 2004 and the first half of 2005 saw pork packer margins ride a roller coaster that was indeed wild. Packers would push up product prices and/or push down hog prices enough to get margins to acceptable levels, then bid those margins away in pursuit of hog supplies. When margins got painfully low, packers would start the process all over.




They have shown much more restraint this year and kept margins far more steady -- good for the bottom line, as well as the stress.







Click to view graph.


Steve R. Meyer, Ph.D.

Paragon Economics, Inc.

e-mail: steve@paragoneconomics.com