Pork Commentary

Jim Long President – CEO Genesus Inc. info@genesus.com

Looking for the Pony in the Manure Pile!

March 23, 2015

  By nature swine, producers like us are more optimistic than the general population. We are entrepreneurs, we believe that we breed a sow and 10 months later, we will have something to sell, we fight through all the issues Governments throw at us i.e. Environmental, housing, food safety, labor, etc. We are by nature optimistic, but our strength is our weakness. It is why when we make some money we try to expand. We cannot help it; it is how we are wired. It is why many producers read what we write. We look for the positives and we say what we think. When we were kids, we could see “The Pony in the Manure Pile”. By nature, there is a belief that there is usually something good is going to happen. It’s why despite five years of next to zero margin, swine flu, border issues, animal rights, environmental, PED, etc. we make some money and the industry forgets the past and wants to expand. As an industry we look forward, we know the past but somehow believe this time it will be different. With this in mind, forgive us as we look for positives, despite last Friday’s lean hog futures closing at life of contract lows. Not wanting to be a “One Trick Pony”, we will continue our observations why lean hog prices have significant room for the upside. Our Observations
  • March 1 US Cattle on feed numbers released last Friday. February placements down 8.1% from a year ago. Cattle on feed down 1%. It appears as expected the cattle inventory is not expanding and beef supply will continue historically low over the next few months. We continue to believe that the spread between beef cut – outs at $2.44 per pound versus pork at 68¢ per pound cannot be maintained. The spread will narrow as lower pork price will increase pork demand and sales both domestically and internationally which in turn will pull pork cut – outs higher.
  • West Coast Pork Strike is settled but it takes time for distribution chain to get back to speed. Every day we suspect that more pork is flowing out.
  • Since the first of January, US slaughter weights have dropped 3.8 lbs. and are continuing to decline. Our cowboy arithmetic says that is about 600,000 hog possibly pulled forward. That could explain about a 3% increase in marketings year to date.
  • Slaughter weights have been dropping and it looks like they were down again last week. After a while, this will be positive but in short term it leads to more hogs and pork into the market. The December 1st USDA report indicates that there would be 3% more hogs year over year in the most recent time frame. The last few weeks hog numbers have been running 8% – 10% more! That’s a difference of 5% from USDA numbers or over 100,000 hogs a week difference? Was USDA out that much? We suspect it has a lot to do with weights being pulled down which is increasing marketings. At some point, there will be an upside for prices as weekly marketings fall.
  • China’s government latest hog number count is the end of January. It is estimated another 1 million sows were eliminated in January! Market hog inventory dropped 16 million head from the month before.

The numbers are mind-boggling. The Chinese market inventory is down about 35 million hogs from a year ago and the sow herd down 14.7% or 6 million sows.

The market hog inventory will drop even farther as the sow herd liquidation factors further into supply going forward. When in January, China eliminated one million sows we all know that train didn’t stop January 31st. More sows are already gone and probably still keep going and fewer hogs are in the future. China’s market hog price is 88¢ a pound US liveweight. USA is 44₵ per pound liveweight. China’s producers are liquidating at twice the price compared to what US producers get for their hogs. That tells us how high China’s cost of production is. Going forward at some point we estimate China weekly hog marketing will be 1.5 million a week lower. Hog prices will increase. The US is the logical supplier for imported pork. An extra 100,000 head equivalency to China is a game changer; it’s PED without the deads. With Smithfield Chinese owned, the supply chain is in place to lead the export surge. In our mind, it’s not if, but when China supercharges our prices.

We continue to look for the Pony in the Manure Pile!

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This post was written by Genesus