Hog prices continue to stay strong with cash prices hovering over $80/cwt., carcass. Pork producers are making good profits – in most cases over $25/head – allowing many in the industry to begin to heal from a very long period of losses.
While producers are happy to see their balance sheets improve, I have had several ask why there is such a wide spread between cash hogs and cutout values? The key items to look at in Figure 1 are the dark blue (2010) line vs. the light blue line. We are running quite a bit above the historical level. I don’t have a good explanation of this market spurt, but it has been interesting to observe the number of pigs sold on the spot market the last couple of days. On Wednesday, Aug. 18, the number of pigs sold on the spot market in the western Corn Belt was over double the number of pigs sold through the spot markets over the past month. The interesting thing is that cash hogs for Aug. 18 jumped over $4.50/cwt., then the next day (Aug. 19) cash hogs were down at least $1.19/cwt. from the prior day report.
The issue is there are too few pigs being sold on the spot market. I am one lender who is stating – we need more pigs sold on the spot market.
Sell Some Hogs on the Spot Market – I’m not smart enough to know what percentage of your production should be sold on the open market, but I encourage producers to sell at least 10% of their hogs on the spot market. Yes, it will take some effort and resources to do this successfully.
Selling on the spot market when the hog supply is tight, like it is today, reaps some financial rewards. When hog supply is too large, the spot market is not a good place to be (Figure 2). Remember August 2009? I had producers trying to sell on the open market who couldn’t find a place to sell their hogs for almost three weeks.
Selling a portion of your pigs on the spot market helps with risk management, too. If hog supplies are tight, packers start looking for hogs, cash hogs go up and, generally, so do hog futures. The same holds true when hog supplies are plentiful. When supply lines are full, packers stop looking for pigs, which is a good time for producers to start taking a more defensive strategy. Again, this is not easily done, but I think producers need to look at selling some portion of their pigs on the spot market.
Feed Costs Trending Up – A Good Thing – In last month’s Market Preview column, I wrote that December corn was at $3.85/bu. Corn is now nearly $0.50/bu. higher. Soybean meal is also higher by $10-$15/ton. Looking at average breakevens for most producers for the next 12 months at current feed costs, we are approaching breakeven costs of over $135 for a 270-lb. market hog sold for $0.50/lb., on a live weight basis.
Sure, pork producers are feeling good about the revenue they are receiving, but as they look forward no one is feeling overly confident that margins will be great forever. Much depends on where cost of production is headed. Some producers were thinking about expansion, but for now those have been tabled. It seems that even though the U.S. corn crop is going to be very good, the new range for corn is between $3.50 and $4.50/bu., at least for now. That’s a far cry from the days of $2-$3/bu. corn.
Click to view graphs.
Swine Industry Consultant
Contact Greenwood at firstname.lastname@example.org