It was another good week for pork producers as hog prices rose and corn prices fell slightly. While welcome, producers are still losing nearly $20/head. At this point, we will take improvement where we can find it.
Last week’s higher hog market was driven by a $2.50 increase in the cutout value. The weekly average of $62.76/cwt., carcass, was the second highest weekly observation of the year – second only to the week of July 25 (see Figure 1), when packers had slowed chain speeds to restore packer margins from their awful levels of the first half of the year.
Higher cutout values led to higher hog prices as well as the fall price rally. We haven’t seen those four words strung together lately. Figure 2 demonstrates the rarity of a fall price rally. The only one of any significance prior to this year happened in 2004, when prices approached the high for the year in the first week of December and then plunged over $15/cwt. by year’s end.
It may be difficult to sustain this rally since there usually is not a single pork cut that can carry the cutout value higher this late in the year. Last week’s cutout increase was driven, as would be expected with Christmas at hand, by hams and not usually associated with Christmas, spareribs, which went up $4.63/cwt.
The first week of December is usually the last hurrah for the domestic ham market, so any continued help will have to come from exports. The lower U.S. dollar and continued economic recovery are both positive for exports, but I doubt their impact will be large enough to offset the usual seasonal slowdown in the domestic market.
Continued higher prices will, thus, depend on supplies. Last week’s federally inspected (FI) slaughter was positive on that count as well. The weekly total of 2.267 million head was 4.3% lower than last year and 1.3% lower than expected from USDA’s Sept. 1 inventories (Figure 3). It was also the lowest weekly total since Labor Day. Further, USDA’s preliminary estimates of slaughter weights were unchanged from one year ago at 204 lb. My forecasts suggest lower weekly runs for the remainder of the year, so I believe a 2004-style crash is unlikely, even with seasonally-softer product demand.
The five-year averages for hog prices in Figure 1indicate that, historically, the first quarter of the year is very difficult for pork values. Supplies usually remain relatively high in Q1 and demand is almost always slack until Easter ham demand pushes things upward.
Corn Price Signals
Last week’s corn price decline was very small, but it does continue the trend that has been in place since late October. I don’t expect corn prices to move dramatically in either direction, but I would be most surprised by any significant decline given the current profitability of ethanol production. Margins in that sector are as good as they have been in over two years, which should drive higher ethanol output and, therefore, solid corn demand for the next few months. The keys to this incentive, of course, will be oil and gasoline prices.
A Reader’s Zinger
Finally, I have to pass along a reader’s comment regarding last week’s lament of the pickle we economists find ourselves in. I referred to Kalika, the many-armed Hindu goddess of time and change, but our reader recommended that it might be better to use Ancient Suburbia’s god “Eggo – the God of Waffling.” Ouch! But, point well taken.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.