While it is interesting to be an observer of agricultural price movements, Purdue University agricultural economist Chris Hurt said for many producers of agricultural commodities, prices are a key driver of their financial well-being. In fact, he said wide-ranging price movements over time can vastly alter their financial conditions and can also affect many agricultural input businesses, as well.
What can happen to prices of agricultural commodities over a decade, and why look at the last decade? Hurt said this is done because 10 years ago, in the fall of 2006, agricultural commodity prices began to head upward in what can be described as a boom/moderation price cycle.
“Nearby futures prices are used to compare prices over time. Measured this way, prices for wheat, corn and lean hogs in the fall of this year fell to 10-year lows, dating back to 2006 or earlier. Unfortunately, costs of production are not at 10-year lows, and this means narrow margins or losses are likely for many producing these commodities,” he said.
Focusing on lean hog futures prices, the low this fall was on the October 2016 contract, at $40.70/cwt. According to Hurt, the last time lean hog futures were this low was in October 2002, which means "lean hog futures in the fall of 2016 were the lowest lead contract price in 14 years.”
Lean hog futures have recovered somewhat since October, with the lead contract currently trading at around $50, a level that is at the lower end of the 10-year range.
Cash prices also reflect the multi-year lows, Hurt said. Live prices of hogs for 51-52% carcasses are expected to average about $36.25 in the final quarter of this year. “This will be the lowest fourth-quarter price since 2002 — the lowest cash prices in 14 years, the same as lean hog futures," he said. "The current quarter is shaping up to have the worst losses since the first quarter of 2008, when cash corn prices moved above $4/bu. after many years around $2.”
According to Hurt, a 3% increase in this quarter's pork production is one of the forces keeping prices low, but shortages of packer capacity seems to be another factor that is adding downward force on low farm prices.
“Over time, the pork industry growth has reached a point where more packer capacity is needed. In addition, the largest hog supplies of the year tend to be in the final quarter, which puts added seasonal pressure on capacity,” he said.
Hurt explained that it is generally thought that 2.5 million head per week is near federal inspection capacity. In four of the past seven weeks, the number of head processed at federal inspected plants has exceeded 2.5 million head.
“When there is a shortage of capacity in any industry, there tends to be high returns to those who own that capacity. That seems to be the case this fall, as the farm-to-wholesale margin is at record-high levels,” Hurt said.
The most recent U.S. Department of Agriculture data showed that the farm-to-wholesale margin for January through October has averaged 68 cents per retail pound this year, compared to 56 cents/lb. for the same period in 2015. “If all of this higher margin were bid into the farm-level price, it would increase live hog prices by $5-7 per live hundredweight.”
After prices average about $36 for the final quarter of 2016, Hurt said prices are expected to improve to about $40 for the first quarter of 2017, with head counts that are a little smaller. Then, seasonally smaller supplies in the second and third quarters could support live hog prices of around $50.
Two new processing plants are also expected to come on line by the fall of 2017, which should alleviate the capacity shortage and allow hog prices to be higher a year from now. Current forecasts are for live hog prices to average about $43 in the fourth quarter of 2017. Live hog prices averaged around $50 in 2015 but will drop to about $46 for 2016 and are forecasted to average near $46 again in 2017.
With current costs estimated at $49, this means losses of about $34 per head for this quarter and around $27 per head for the first quarter of 2017, Hurt said. “The second and third quarters should be about breakeven, with loses of $19 in the final quarter of 2017,” he added.
The forecast for annual losses of about $11 per head in 2016 is expected to continue for 2017, he said.
“More packer capacity will help hog prices in 2017. In addition, retail pork prices are expected to continue to drop and provide stronger domestic usage, and pork exports are expected to grow in 2017 as well. Nevertheless, these positive factors will not be enough to bring the industry back to the breakeven level,” Hurt said.
The industry will need to consider a reduction in the breeding herd in the last half of 2017 in order to boost prices closer to breakeven levels in 2018, he added.
The December fed cattle future market were mostly lower this week. Nearby contracts closed lower Monday at $108.75/cwt., and despite closing higher Tuesday at $109.85/cwt., they closed lower again Thursday at $109.05/cwt.
January feeder cattle futures were mixed. Nearby contracts closed lower Monday at $124.325/cwt. but posted gains Tuesday and Wednesday before falling again to Thursday’s lower close of $126.60/cwt.
For the beef cutouts this week, Choice was higher at $189.48/cwt., while Select was lower at $171.42/cwt.
December lean hog futures were higher this week. Nearby contracts closed higher Monday at $51.50/cwt. and continued to climb through Thursday’s higher close of $55.675/cwt.
Pork cutout values were higher this week. The wholesale pork cutout was lower at $75.88/cwt. Loins were lower at $67.64/cwt., while bellies were higher at $102.32/cwt. Hams were lower at $78.47/cwt.
Hogs delivered to the western Corn Belt were higher this week, closing at $50.93/cwt. on Thursday.
In the poultry markets, the "Poultry Market News," which reports the Georgia dock, has been suspended as the Georgia Department of Agriculture reassesses the data collection protocol. The last reported price was Nov. 28 at $1.0975/lb. Breast meat prices on that date were lower at $1.36/lb. Leg quarters were lower at 28 cents/lb., while wings were higher at $1.57/lb.
USDA reported the Eastern Region whole broiler/fryer weighted average price at 83.94 cents/lb. on Dec. 2.
According to USDA, egg prices have been steady, with a higher undertone. Supplies have been light to moderate. Demand has been moderate to good.
Large eggs delivered to the Northeast were higher at 59-63 cents/doz. Prices in the Southeast and Midwest were also higher at 59-62 cents/doz. and 52-55 cents/doz., respectively. Large eggs delivered to California increased to $1.18/doz.
For turkeys, USDA said the market was steady to weak, with offerings unchanged to lower. Demand has been light. Prices were lower at 96 cents to $1.11/lb. for hens and 96 cents to $1.14/lb. for toms.