Weekly federally inspected (FI) hog slaughter totals have returned to “expected” levels the past two weeks, actually exceeding the numbers suggested by USDA’s March Hogs and Pigs report by roughly 23,000 and 16,000 head, respectively. Those slight over-runs, of course, follow three weeks in which slaughter runs were sharply lower than the numbers expected from the report, with the cumulative slaughter since March 1 still 110,000 lower than the forecast level (Figure 1).
The April shortfall was driven by several factors. Lingering performance challenges cannot be ruled out, though most of the production adjustments to corn and feed quality were accomplished last winter. And, some cattlemen understandably decided to “feed them a little longer.” The difference in the outcome for cattle feeders and hog producers, of course, is that when cattle feeders do this, they are usually hoping for a reversal of an ongoing price decline and the extra weight just makes the price decline worse.
Hog producers’ decisions this spring were based on a rapidly rising cash market that promised more profit for more pounds. And it worked! Average carcass weights have been 205 lb., their highest of the year, in three of the past five weeks and, for the first time this year, last week exceeded year-ago average weight by 2 lb. But the extra weight has done little to slow the rise in the cash hog market – a win-win for producers.
Smithfield Shifts Buying Matrix
The final factor that contributed to the April “shortage” was an increase in the lower weight limit on Smithfield’s buying matrix. The change put larger discounts on lightweight hogs and was, no doubt, a driver for some hogs on the East Coast to be fed longer, thus reducing the number sold in any given week. Smithfield’s plants in North Carolina and Virginia can slaughter over 50,000 hogs per day. Just a one- or two-day delay in the marketings heading for those plants can account for the weekly shortfalls of actual vs. predicted slaughter.
Where will this cash hog market peak? Through last Friday, we have yet to see a daily average price on either the purchase data or slaughter data exceed $90, though the average net negotiated price, which includes premiums, reached $89.67 Friday. Every day since April 22 has seen the high price of the net negotiated price range exceed $90 and it hit $97.74 on Friday, meaning some lots of pigs probably grossed over $200/head.
History tells us, though, that the market may be very near its seasonal high. Figure 2 shows weekly average prices and includes the averages for 2004-2008. This five-year period saw two almost identical peaks for weekly prices during the year, one coming in mid-May and one in mid-June.
Figure 3 shows the weekly data for each year since 2002 (when mandatory price reporting began) and the separate-year data bear out this “double peak” for seasonal prices with most years peaking in mid- to late-May or mid- to late-June. The notable exception, of course, was 2008 when prices reached their seasonal peak in August on the strength of record-setting exports, driven primarily by Chinese purchases.
Historical data from the Moore Research Reports, provided free of charge in pdf format by the Chicago Mercantile Exchange (CME) Group at its website (www.cmegroup.com), points to historical mid-May highs for June and July CME Group Lean Hogs futures as well. Contracts from August through December, however, have historically peaked near the expiration of the August contract.
Will Consumers Pay Higher Prices?
Finally, there has been a lot of attention paid in the past few weeks to retail meat prices and the prospects for record prices this summer. The price explosion of fed cattle, hogs, wholesale beef and wholesale pork this spring says that these retail prices have to go up eventually. Many retailers and foodservice operators have yet to fully see the higher wholesale prices of the past eight weeks because a substantial portion of purchases are made three to six months in advance. This is especially true for foodservice businesses. When those buyers have to go back into the market to replenish supplies or make their next long-term deal, costs will almost certainly be higher and those costs will be passed along.
The next question will be, “How will consumers react to those higher prices?” The answer will be critical for meat and poultry markets the rest of 2010.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com