Larger pork supplies and the easing of disease issues in China are helping cut into futures prices.
“Nearby lean hog futures have come under pressure in recent weeks, and the premiums following African swine fever outbreaks in China have been mostly erased at this point,” write economist Len Steiner and associates in their Daily Livestock Report.
“Pork supplies in recent weeks have been higher than expected, pressuring pork prices lower and thus pinching packer returns and demand for hogs in the open market. Estimated packer margins are currently near the 10-year average, and well below recent history for this time of year.”
Steiner and associates use three factors when considering gross margins — weekly pork cutout values, by-products value as calculated by the Livestock Marketing Information Center, and net national hog price.
However, since some packers also produce large numbers of hogs, each packer may have different values attached to those factors, Steiner and associates say.
“This means profitability needs to be viewed in the broader scope of a vertically integrated operation,” they said, adding that in 2018, roughly 32 percent of all market hogs reported through the USDA’s mandatory price reporting system were owned by packers.
“One of the inputs in that gross margin calculation is the price that packers are paying for hogs delivered to them,” Steiner and associates said.
Weekly hog slaughter reached a high of 2.7 million head in December, compared to 2.5 million in late January and an estimated 2.45 million for February.
“More packing capacity and fewer available hogs tend to bolster hog prices and pressure margins,” Steiner and associates said. “Additionally, it is important to understand the myriad ways in which hogs are priced and delivered these days. Gone are the days when all you had to do was look at the IA/MN lean base price and have a pretty good idea where hogs were trading at.”
The average national base price for barrows and gilts sold by producers was $60.95 per hundredweight for the week ending Jan. 25.
“This is the input we used to calculate the gross margin above,” Steiner and associates said. “And yet, the average net price of negotiated hogs was $53.17/cwt., or 87 percent of the average price for the week.
“While you may be used to looking at the negotiated price, those barrows and gilts represented just 2.7 percent of the producer-sold hogs and the discount to the overall price was substantial.”