Your Reading List

Hog Prices Grind Lower

In the previous issue, I mentioned that weaker demand would result in lower hog prices. Analysts now see further deterioration in the economy and this will continue to pressure the hog market. Export interest for pork products remains sluggish as the US recession continues to set a negative tone around the globe. Uncertainty over the US Country of Origin labeling laws and potential retaliation from major US buyers are also causing wholesale prices to decline. Packing margins are in the red resulting in a lower than anticipated slaughter pace. Producers are starting to hold back on hogs in hopes of higher prices but this is doing little to support the overall market. Under the current environment, the industry will likely experience further contraction over the next year. The function of the market is to encourage demand through lower prices.

The US lost nearly 600,000 jobs in January pushing the unemployment rate to 7.2 percent. There is potential for additional layoffs over the next couple months and unemployment is still on track to reach 10 percent by December. In Canada, some analysts are now projecting a loss of 325,000 jobs in 2009; this is up from earlier estimates of 225,000 jobs. This could also cause unemployment to rise to 10 percent by the end of 2009. Consumers are holding back on purchases as confidence stays near record lows. The days of storing larger volumes of meat in the home freezer are over for many consumers. There has been a change in buying patterns for the average consumer. Keep in mind there are 31 million Americans on monthly food stamps. The average US and Canadian consumer needs to increase pork consumption to absorb the larger supplies. This will be difficult for the market to absorb with so many consumers on “least cost” budgets. In the past two years, pork has made significant inroads to casual and higher end restaurants. However, we are now seeing this demand decline sharply with fewer people eating out. The premium for certain cuts of pork has eroded lowering the value of the overall carcass.

Offshore pork exports for 2009 from Canada and the US were earlier expected to be down 10 percent in comparison to 2008. The export pace has now become more uncertain and I feel we could see exports drop nearly 15 percent under the current price structure. The US dollar has strengthened approximately 8 percent against other major currencies from the lows in mid December which is also tempering export demand.

Cash hogs in the US were trading in the range of $36 to $38 depending on the location. Poor margins are causing packers to cut back on the weekly slaughter. The Meadowbrook Farms Pork plant (3600 hogs per day) suspended operations temporarily and this is causing some short term weakness in the cast trade.

Western Canadian markets are trading in the range of $1.35/kg to $1.40/kg. Forward contracts available to producers for May through August are in the range of $1.70/kg to $1.80/kg. I feel these are very good prices in the deferred months given the current economic environment. The hog market usually makes a seasonal low in late summer but the futures market is showing very good prices for this timeframe. There is a significant risk that prices could move back to historical lows. Producers should look at locking in a portion of their production or using a futures and options strategy that limits the downside and leaves the upside open. Spending some money on price insurance for late summer and fall marketings would be prudent at this time.

About the author

Gerald Klassen's recent articles

Comments

explore

Stories from our other publications