Hog futures have rebounded in recent days, led by a 200-point hike in the July contract.
This could tighten packer profitability, economist Len Steiner and associates wrote in the Daily Livestock Report June 30.
“The $11 discount of the cutout to the CME Lean Hog Index was unusual and short lived,” they said. “However, packer margins remain constrained, and the meat margin (spread between cutout and hog values) is close to zero at this point. Does the spread really tell you the profitability situation? It has always been hard to talk about margin levels in the hog industry given the myriad formulas and ways in which packers price hogs.”
Factors in profitability vary between packers, Steiner and associates said. Things such as exports and byproduct values also come into play. A decline in slaughter numbers also impacts plant efficiency.
“Depending on the hog price benchmark that one picks for the margin calculation, one can end up with different results,” they said. “For the week ending June 26, for instance, USDA reported lean hog carcass prices in a range of $99 to $122. The net average price of producer-owned hogs sold last week was $109.74 vs. the average pork cutout value of $111.89.
“So while the cutout discount to the CME Lean Hog index looks quite dramatic, we are not sure how instructive that is with regard to packing profitability.”
Almost 38% of pigs slaughtered last week were owned by packers, Steiner and associates said. This is very close to weekly averages year to date.
There are also varied forecasts regarding pork cutout values.
“There is a fair amount of debate about the outlook for the cutout in the near to medium term,” they said. “With a long holiday weekend ahead of us, packers and end users will be very careful both in terms of slaughter and orders so as to avoid any shelf life issues.
“It is not a coincidence that bellies and hams were down yesterday (June 29) despite the lower slaughter as processors need to manage workflow over the long weekend. Next week will be a short slaughter week and both retailers and processors will be back in the market.”