If there were any doubters out there regarding the potential for large hog supplies this fall, last week's record weekly estimated slaughter run of 2.321 million head should serve as a dose of very cold water. This week could well exceed those numbers, with slaughter through Thursday up 7,000 head or 0.4% from one week ago. Another 423,000 head run on Friday (in line with this week's daily runs) and 218,000 on Saturday (the same as last week), and we would see another record - -this time at 2.352 million head (see Figure 1).
Those numbers are certainly doable, especially given the fact that gross packer margins recovered somewhat last week after being quite tight the week of Sept. 29, when the cutout value fell by more than did hog prices (see Figure 2). I expect gross packer margins to get back above average very soon at these kinds of slaughter rates. One thing to remember, though, is that packers can actually make good money at lower gross margin levels (which is what is represented in Figure 2), since these large slaughter runs drive average fixed costs down by spreading plant, labor, etc. over more animals. Packing plants get very cost-efficient at these throughput levels.
Pork Exports Rebound
USDA's Foreign Agricultural Service released data for August pork exports this morning, and the news was definitely good for hog producers and pork packers. August exports on a product weight basis were 10% higher than one year ago. Year-to-date pork exports are still 3.3% lower than last year, but that is a big improvement from July when pork exports were 4.9% lower, year-to-date, than in 2007. See Figures 3 through 6.
More important for hog demand, though, is the status of export value. The number for export value grew by 14.7% vs. August 2007, and is now 5.9% higher year-to-date, improving from 4.7% higher through July. Added value for pork exports gives packers the ability to bid more for hogs. It is not a guarantee, but at least it makes higher bids possible.
Pork shipments to Hong Kong were up 462% in August vs. one year ago, while shipments to China were up 73%. Year-to-date, pork shipments to Hong Kong are 118% higher than in 2006 and shipments to China are 73% higher. Combining the numbers shows growth of 85% in pork shipments this year.
By-Product Export Growth
The good export news also applies to pork variety meats (or by-products). August variety meat shipments were up 5.5% in volume and 13.5% in value relative to one year ago. Those positive numbers drove year-to-date numbers to -0.7% for volume and +6.2% for value. That compares to -1.6% for volume and +5.2% for value at the end of July.
Is there any wonder that the average drop value per head has been at record levels this summer and contributed mightily to packer margins and live hog demand?
China and Hong Kong were the major drivers of August variety meat export growth. Shipments to Hong Kong were 212% larger than last year and those to China were 97% larger. The values of those shipments were 180% and 128% higher than last year, respectively. Russia was also an active customer in August, purchasing 22% more variety meats that was valued 22% more than last year.
Mexican Trade Concerns
Mexico continues to take fewer products than one year ago, but the year-over-year monthly decline was less in August (-23.8%) than it has been since February. Shipments of U.S. pork to Mexico are still down 30% in volume and 26% in value this year.
Variety meat shipments to Mexico (which is our largest variety meat customer) were down 13.6% in volume and 1.8% in value in August compared to August 2006. That performance was a bit disappointing since July saw year-over-year growth in both of those numbers.
My guess is that higher variety meat prices in August due to heavy interest by China/Hong Kong had an adverse impact on Mexican sales, especially given the price-sensitive nature of the Mexican market.
I have written several times that the problem in Mexico has been two-fold: higher tortilla prices which have reduced the amount of money consumers have to spend on meat, and higher domestic pork supplies due to liquidation caused by high feed prices. It appears from my contacts that these have been, on balance, about equal in their impact on U.S. exports. It still appears that the liquidation will slow this fall as hog numbers reach somewhat of a minimum and feed prices fall a bit. It certainly does not appear that Mexican demand for U.S. pork had improved much as of August, however.
Export Shining Stars
And after all of that, let us not overlook excellent performance in our other two big export markets. Shipments to Japan were up 15.5% in volume and 17% in value in August, while shipments to Canada were up 24% in volume and 30% in value.
The August data are definitely good news for the U.S. pork industry. I have sometimes felt a little silly predicting that we were still going to set a 16th-consecutive annual export record when the news, through July, was pretty bleak. But I think that is definitely within reach given these data and the fact that supplies will be ample this fall. Export markets are price-responsive, too, and lower prices will help move volume -- and we are going to need all the help we can get on that count!
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com