Jim Long, President-CEO Genesus Inc.
Nov. 14, 2016
Is there a Pulse to the U.S. Markets?
We write on a plane over the Atlantic Ocean heading to Germany and the huge EuroTier LiveStock Exposition, held bi-annually in Hannover. We understand there are approximately 2200 exhibitors this year. Genesus will be exhibiting. We expect many European and Asian visitors as this is probably the largest swine, cattle and poultry exhibition in the world. In next week’s commentary, we will give our observations.
There might be a pulse in the U.S. market. These past two weeks, cash early wean pigs have jumped in price by $8 per pig, last week averaging $29.06. A big improvement from the prices under $10 each a few weeks ago. The price increase is a good indication of supply relative to demand. We expect cash early weans will be hovering around $40 average the first part of December.
Lean hogs are averaging $0.48 USD/lb right now. Financial losses at this price are $20-30 per head for many producers. It’s not a pretty time. A year ago, the U.S. price was $0.10/lb higher or $21 per head. Of note, U.S. national lean hog weights a year ago were 215.89 lb (carcass). This year, the latest full week was 210.75 lb. That’s 5 lbs lighter than a year ago, a big difference. We believe that producers’ fear of packers’ shackle space shortage this fall has encouraged producers to be aggressive shippers. This has not only kept weights lower, but has also allowed packers to push prices even lower.
This past week, the U.S. marketed 2.452 million market hogs. Year to date, the U.S. has marketed 100,948,000, up from 1.6 million from the same time a year ago. Let’s do some farmer arithmetic, if hog carcass weights are 5 lbs lighter than a year ago. The 5 lbs is about 3 days of growth. Have we pulled ahead a half week of production, or approximately 1.2 million head?
If we have truly done this, at some point producers could get a happy surprise. Let’s say numbers drop 2.452 million to 2.25 million. USDA cut-outs at the end of last week averaged $0.749/lb while the hog price was $0.48/lb, a $0.27/lb spread giving packers gross margins of over $55 per head. If hog markets tighten from the bonus of already having marketing earlier, two points are not inconceivable.
U.S. pork cut outs at $0.749 reflect tremendous pork demand in the face of weekly marketing of 2.4 million plus head. If hog numbers drop, would pork cut-outs hold or possibly increase? If hog numbers drop, wouldn’t packers start to chase hogs, giving up packer margins (but still have excellent profit)?
We believe that it is quite possible that a cut in hog numbers going to market could lead to a rapid increase of lean hog prices, we could get to $0.60 lean in two weeks. No packer wishes to give up shelf space, food service, or export markets.
Finally, we have historically only seen sow herd contraction when the hog producers are losing lots of money. They have been losing recently. We believe history will repeat itself. New U.S. packing plants are under construction. There will be over 10 million increased capacity next year. What we see is current U.S. pork cut-outs of $0.74 in the face of record production. That’s positive. We expect fewer pigs coming in the future due to financial losses. These lower pig numbers will be positive. Business has cycles. Everyone gets their turn in the wheel barrow. Right now, it’s the packers’ golden moment.
This post was written by Genesus