Over the past 3-4 weeks, hog prices have been stuck in a narrow range – hovering around $63-$66/cwt., carcass, or close to $125-$130/head. Although this is much better than we have seen for quite some time, producers are hoping we will get to a plain of $140/head or more.
During the third week of January, there was a huge run-up on pork cutout values. Since then, values retraced and have stayed in a range of $68-$70/cwt., carcass (see Figure 1, attached). When cutouts were close to $80/cwt., carcass, we were starting to get some resistance and packers started featuring items other than pork. The point was made that while we had a quick run-up, we needed to take a breath and settle into a range for a period of time. There are some favorable signs in the chart. The pork cutout value over the last month has shown strength that we have not seen since 2002 – with the possible exception of 2005.
We are at historically high values for this time of year, but the problem the industry faces is that the new cost of production level requires higher prices than we’ve experienced historically.
A Closer Look at Pork Supply in 2010
I can’t tell you how many times I have been asked what level of supply is needed for the pork industry to be profitable. All I know is that I am not smart enough to say exactly where supply needs to be.
A number of factors can affect prices. Recently, I have been working on a chart that looks at disappearance (see Figure 2, attached). The factors I am examining are average weekly slaughter numbers, average carcass weight sold, U.S. pork exports, and pork imported into the United States. In the chart, I compare the year-to-year difference in supply or, if you prefer, the disappearance of pork left in the United States. I have also projected the 2010 figures.
I have pulled many factors into this “disappearance” chart, but I would like to point out a couple of assumptions I made to project the sharp reduction this summer. I held U.S. pork exports at a slight increase for the year and then looked at supply and slaughter weight – the biggest factor. Summer 2009 was very cool, which pushed slaughter weights far above the historical average. If all of my assumptions come to reality, we could see pork supply down well over 5% for the summer. In addition, it’s important to note that this year’s corn crop is not of the best quality and I think that could compromise daily gain averages. If we have a normal summer and feed the poorer quality corn, I think we could see pork supply down close to 10%. This will be an interesting dynamic to keep an eye on throughout the year ahead.
Click to view graphs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com