At the end of last week’s column, I mentioned that the good news regarding the corn crop (which hardly anyone, it appears, is believing) was made even better with the realization of record-high hog and pork prices the last week of June. Record-high hog prices were not a common occurrence in the past, but they seem to occur rather regularly these days. The reasons involve fundamental shifts in industry dynamics.
First, let’s take just a moment to enjoy and appreciate hogs prices over $100/cwt. on a carcass weight basis. Figure 1 shows the weighted average net price across all purchasing methods. It peaked out the week before last at $99.63/cwt., but remember that includes all of the pigs that were priced on formulas, including futures prices and feed- and cost-based prices. I use this price a lot because it represents the average cost of all market hogs to packers and, conversely, the average revenue for all market hogs sold by producers. The weighted average net price for “negotiated” market hogs that week was $104.16/cwt., carcass, significantly higher due to relatively tight hog supplies and the resulting leverage that creates in producers’ corners.
This all means that a pretty good number of pigs brought $200 or more over the past few weeks with some big, lean hogs netting as much as $230-$240. There may have even been a few that garnered $250! Those kinds of per-head prices used to be the realm of breeding stock and off-the-wall show pigs. While certainly not commonplace, they may be the harbinger of things to come.
Figure 2 shows the first reason for that statement: Pork carcasses are simply more valuable than they once were. Had it not been for H1N1 influenza in 2009, this may have been the fourth straight summer of $90-plus cutout values. And note that we penetrated the $90 level twice last year and have stayed above it virtually all of 2011 in spite of 1% more pork being produced in the United States and 0.5% more output from the U.S. and Canada combined. Higher prices and higher output equal higher demand for U.S. pork at the wholesale level.
Exports have been a big part of that picture, but domestic demand is still running above year-ago levels, as well. Further, I think pork and beef demand may both strengthen if the current reductions of chicken output continue. Low-priced chicken has been a drag on the demand for other meats and any improvement in those prices – which broiler companies badly need – will help our demand as well. Whether the positive of higher broiler prices outweigh any negative factors, such as unemployment, consumer confidence, an overall anemic recovery, etc., remains to be seen. But let’s accept positives when they come!
The second reason is that higher costs have raised the point around which any new hog cycle will oscillate. Figure 2 shows that 2008’s shock-driven spike above the long-run downtrend in cutout values has now been trumped by nearly 18 months of prices above the top of that down-trending channel. I do not believe we have enough data to determine any direction for a new trend, but everything points to an upward shift even if the trend remains downward.
Average production costs in the $80s, on a carcass weight basis, suggests that this market will return to these $100 levels at the top of future cycles. Some of you may be asking, “What cycle?” It’s a good question, but one to be addressed another day.
What does all of this mean for prices the rest of this year? These $100 prices are very likely the high for the summer. It is not uncommon for August prices to set new highs, but that normally happens when the previous spike high is May. The historical seasonal pattern, though, suggests that prices may remain near these levels well into August.
Further, $100-plus hogs in July imply a very good fourth quarter. The average decline from 2005 to 2009 from the seasonal peak in July to the seasonal low in November was $17.47/cwt. That would put hogs in the low- to mid-$80s at their low, implying Q4 prices in the upper $80s – roughly $5 higher than my current forecasts based on the June Hogs and Pigs report and steady pork demand.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.