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CME - Daily Livestock Report

05 November 2010

Lean hog futures were generally higher on Wednesday as market participants were buoyed by reports of improving cash pork prices and better packer demand for hogs in the coming days, write Steve Meyer and Len Steiner.

Hog and pork prices were hit hard in October as a combination of seasonally higher slaughter numbers, heavy hog carcass weights and the desire of producers to get ahead of weight gains created a short term glut of product.

The supply imbalance appears to have been normalized to a certain extent. Hog weights remain near all time record levels but they appear to have leveled off and they are actually down compared to late October.

Based on the MPR slaughter data (LM_HG201), hog carcass weights for Tuesday November 2 were 207.55 lb (dressed weight, wt. average). This is still about 3 pounds heavier than a year ago but lower than the 209+ carcasses we saw towards the end of last week. Hog slaughter this week is currently on track to be around 2.3 million head, about the same as a year ago. However, there are some reports that Saturday slaughter will be quite heavy so it is possible we may see a few more hogs coming through. The question that the market is grappling with is what happens with slaughter in December. We have speculated that producers accelerated marketings in October to account for the fast weight gains. Hog weights seasonally increase in October and November as hogs are fed better feed and enjoy cooler weather. This year, weather has been quite good and the significant difference in feed quality had a dramatic impact on hog feed intake. If this assessment is correct, then we should see a dip in marketings in late November and December. Markets continue to expect a bump in December with the nearby Dec LH contract at $66.725/cwt compared with cash IA/MN lean hog prices of $59.39/cwt. As the top chart shows, the spread between cutout values and cash hog prices currently is near the highs for the year, again not unusual for this time of year.

Packer margins should be quite good and if hog supplies tighten in the coming weeks, it is likely this will translate in higher hog prices for December and January. A big unknown at this time is the state of pork exports. We have noted that US beef exports this fall have increased sharply (weekly sales report) and private sources indicate that pork exports also are doing quite well. We noted in yesterday’s letter the impact that a weaker US currency is expected to have on grain exports and the same can also be said about meat products.




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