HOG PRICES RECOVER, WHAT NEXT?
How can hog prices be $8 at Christmas
and $30 three weeks later? If hog prices are $30 today, how could
the depressed levels of December be justified? In any case, the
entire industry is breathing a sigh of relief and beginning to
ask what went wrong? and what are the lessons to be learned?
First, lets examine what has changed
since the price lows were made in December. Of most importance
is the reduction in slaughter. It has been well documented that
slaughter numbers in December exceeded the ability to adequately
handle the flow of hogs from producers. In the week prior to Christmas,
the industry processed a record 2.243 million hogs. By the third
week of January, slaughter dropped to 2.015 million, more than
a 10 percent decline.
Second, the slaughter rate has been
fairly close to USDA inventory estimates for the first three weeks
of 1999. Weekly slaughter in December ran from 9 to 16 percent
above the same week a year earlier. In the first three weeks of
January, weekly slaughter was up from 4 to 6 percent. USDAs
inventory count for January suggested that slaughter should be
about 4 percent higher.
Adding to the supply glut in December
was a backlog of hogs from late November and early December. This
led to an increase in weights as hogs were forced to stay on farms
longer than intended by producers. Hog weights advanced from a
weekly average of 258 pounds in late November to 262 pounds by
mid-December. By the third week of January, weights had backed
off once more to 258 pounds.
Just as important has been the remarkable
recovery in wholesale values of pork. In the week before Christmas,
wholesale pork belly prices were 35 cents per pound, hams were
29 cents, and loins 68 cents. By the third week of January, belly
prices had risen by 46 percent, hams by 45 percent, and loins
by 63 percent. Measured as the wholesale value of a typical hog,
the "cutout value" rose by 46 percent.
Two factors have provided the sharp
increase in wholesale values. The first was the lowering of retail
pork prices starting about mid-December. Consumers purchased more
pork as they responded to lower prices, more featuring of pork
in grocery store adds, and the blitz of media reports detailing
the plight of the producer. The second factor was the adverse
winter weather which disrupted shipments of hogs from farms to
packers during the first three weeks of the year. With stores
featuring pork at bargain prices and packers unable to supply
the same volume of hogs, some shortages of featured pork cuts,
such as pork loins, actually developed in January.
The final factor providing sharp
recovery in hog prices was the narrowing of margins for retailers
and packers. Retailers failed the pork industry in 1998 by keeping
retail prices excessively high. They failed to send the price
signals to consumers that pork was in large supply relative to
demand. They kept retail prices almost constant when wholesale
prices dropped sharply. This changed in late December and January.
Packer margins also increased dramatically
in November and December, resulting in large profits. Packers
could have paid higher prices for hogs in relation to the product
value of the pork they were selling. Preliminary estimates are
that in relationship to the wholesale value of pork, packers could
have paid about $28 per hundredweight for hogs in December (and
still covered costs) as opposed to the $14 that was reported by
USDA. However, packers are in a commodity business where processors
normally only pay producers an amount sufficient to keep raw product
moving to their facilities. At times in December, packers could
have bid $4 per hundredweight, or less, and had sufficient supply.
As of the third week of January,
packers could pay in the range of $35 per hundredweight for hogs,
and USDA reported prices in the high $20s or low $30s. Packer
margins were still positive, but had narrowed from the December
In summary, we can identify the
sources of the approximately $20 per hundredweight improvement
in hog price between Christmas and January 25th. As measured at
the farm level on a liveweight basis, wholesale prices rose by
around $12 per hundredweight and packer margins narrowed by about
$8 per hundredweight.
Every market observer is now watching
the daily slaughter levels to assess price potential. Slaughter
rates have moderated and are close to inventory numbers reported
by USDA. However, major disruptions in marketings did occur in
the first three weeks of January due to the weather. To what extent
is the improved supply situation simply a weather related delay
in marketings? Will the USDA inventory numbers hold when normal
marketings resume in late January and February?
Retailers may have gotten the message
to "keep pork margins in line in 99" or risk investigations
of pricing policies. Packers also must tread lightly in regards
to increasing margins to the extent they did in November and December.
And of course, producers must report actual inventory numbers
of hogs to USDA so that the industry will have more accurate information
to match processing capacity with the number of market hogs. Finally,
we must integrate the hog supply and processing data for the North
American pork industry, including Canada and the United States.
If the USDA market numbers hold
as reported, hog prices will trade in the higher $20s in February,
low $30s in March, and reach the mid-$30s by April. Summer prices
should be in the high $30s to $40, with fall prices moving to
the lower $40s.
Issued by Chris