U.S Market in Swine PurgatoryThe U.S Market is in what appear to be a swine purgatory. Week upon week of prices in the 65¢ lb lean range. Just above cost of production, 65¢ it’s not hell but it’s not heaven, it’s purgatory. Currently packers are having a nice time of it. USDA pork cut-outs are hovering around 80¢ lb. The 15¢ lb spread or about $30 per head is a good time for packers. We are actually happy cut-outs are about 80¢ as it’s an indication of good pork demand both in the domestic and export market. A hog supply seasonally declines over the next few weeks packers will have margin to increase their payments for hogs while pork-cut-outs should also increase as hog supply decline. We believe the industry is on the cusp of a rapid price increase over the next few weeks. Both that we are geniuses or ag-economists to predict that as May lean hog futures closed 75.70. Higher prices are coming and coming fast. Indeed we expect weekly hog marketings to decline over the next few weeks 200’000 a head from last weeks 2’241’000. When that happens we expect lean hogs well into the 80’s.
PackersThe margins packers have enjoyed over the last while has been the trigger for the new plants that are under construction. Most if not all are producer (owned) driven with hog supply locked up to ensure shackle space fulfillment. If our calculation is correct there will be about 11 million per year new production capacity. There will not be 11 million more hits produced. That means a dog fight among existing packers to lock in supply. This will lead to packers margins being cut. Eventually either enough hogs will be needed to sustain production or some plants will close. Example. In Ontario (Canada) there were three packers. Sofina, Quality and Conestoga. There were not enough hogs to keep plants full. They got in a bidding war for hogs. Ontario prices became the highest in North America. At the same time pork they were selling was the North American price. Summary paying highest price for hogs and selling pork for no more. It ended bad. Quality went bankrupt, burning producers for several million dollars. Quality plant closed and gutted of equipment. Now Ontario has some of the lowest hog prices in North America and some producers having ongoing challenge to get hogs marketed and when they do, for less money. Now good times for Conestoga and Sofina. They won war of attrition. Moral of the story- what comes around goes around. Packer margins have been very good in the U.S. When new plants come on line packer margins will decline. Producers will gain margins. It will be a dog fight. The existing packers have efficient large scale plants, established markets and should be financially strong from the margin accumulation over the last while. There will be no love lost in the battle that is coming. The only thing for sure , packer margins will be lower.
This post was written by Genesus