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Have We Seen the Hog Market’s Low Point?

Let’s hope so for two reasons. First, last week’s prices are still not as low as the prices we saw in January! And second, the pigs we are selling now ate some very expensive corn early in their lives. Some computations using weekly corn, soybean meal and hog prices and a pro-forma production budget show that hog finishers are losing $40-70/head on November sales, depending on their pig-pricing method and feed-buying practices.

Last week’s average negotiated net price fell to $51.35/cwt., carcass ($38.51/cwt., live), the lowest level since late March (see Figure 1) and well below the cost of production. The negotiated net price represents the total price received by producers on hogs where the price is actually determined by some degree of seller-buyer interaction. Therefore, it is about the best thing we have for a producer-received spot price. It comes from the Prior-Day Slaughter report (lm_hg201).

The average total net price last week reached $56.77/cwt., carcass ($42.58/cwt., live), also the lowest level since March. This price includes all pricing methods – negotiated, hog/pork price formulas, other market formulas and other purchase arrangements. The big driver of the $5.42/cwt., carcass difference in these two measures is the price of “other market formula” pigs. The average price of those pigs was $68.94/cwt., carcass last week, over $18/cwt. more than the negotiated hogs and the result of producers’ pricing decisions last summer when the Chicago Mercantile Exchange (CME) Group Lean Hogs futures for December delivery were well above $70/cwt. That, in fact, was the case as recently as Aug. 20.

This price differential – and its implications for producers’ bottom lines – is one reason we have seen only limited sow liquidation in the United States. Many producers took advantage of these prices and have yet to lose much money. Others rode the cash markets and, as last week’s negotiated price level shows, have paid dearly for that decision.

Does that mean you should jump on the bandwagon now and hedge your hogs for 2009? Absolutely not! The current “bandwagon” is not nearly as attractive as the one these producers boarded last summer. The fall months are historically a bad time of year to price hogs on futures markets, since seasonally-low cash markets tend to pull down the entire lean hogs futures complex.

What this does mean, though, is that you should know how to forward price your hogs and be vigilant about watching for opportunities to lock in profits on some portion of your 2009 production. My computations for 2009 cash prices are actually yielding numbers higher than the current CME Group contract prices. Some analysts are quite bullish for 2009. I don’t share that sentiment, but I do think better opportunities lie ahead.

Now, back to the original question: Is the low in? As can be seen from the lines representing five-year averages in Figures 1 and 2, the weeks of Christmas and New Year’s are usually the worst. Holiday meat orders are over and packer hours are usually cut back. That’s not a good recipe for holiday cheer when it comes to hog prices. I really hope last week was the low and this week’s slight rally in cutout values gives us some hope that it was. Still, I think we’ll see more weakness before year’s end. Not much, but some, so be prepared for a few more weeks of very low spot prices.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]