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LIVESTOCK MARKETS: Hog prices outperform expectationsLIVESTOCK MARKETS: Hog prices outperform expectations

Recent live prices have reached mid-$50s, pulling industry out of deep losses and into profitability.

Krissa Welshans 1

March 2, 2017

5 Min Read
younger hogs on a farm
Scott Olson, Getty Images

Purdue University livestock economist Chris Hurt said the pork industry outlook has made a major shift to the upside as pork producers this year have been experiencing higher-than-expected hog prices.

According to Hurt, the low point for the industry was in late November, when hog prices dropped to near $32/cwt. on a live weight basis, but recent live prices have reached the mid-$50s, pulling the industry out of deep losses and into profitability.

“The leading reason for the more favorable outlook is lower retail pork prices,” Hurt explained. “Some have mentioned how strong pork consumption has been this year. One reason for that strength is lower retail pork prices. The ‘law of demand’ says that people will buy more when prices are lower, and retail pork prices have moved lower.”

According to Hurt, retail pork prices peaked in 2014 because of reduced supplies due to porcine epidemic diarrhea virus and have generally been falling since 2015. In the final quarter of 2016, retail pork prices dropped 26 cents/lb. from the same period one year earlier. The downward movement continued in January of this year, with retail pork prices down 22 cents/lb. from a year earlier.

An additional issue contributing to the extremely low prices for pork producers last fall was the small portion of the retail dollar getting back to producers, Hurt said. “Another way of saying this is that the margins for the processors and retailers remained substantially higher than normal. As a result, the portion of the retail pork dollar that got back to the producer dropped to 17.5%. This was lower than the previous record low of 18.4% in the financially tragic final quarter of 1998,” he explained.

Data this year are only available for January, but in that month, the producer share increased to 22%, meaning the hog producer received 15 cents more per retail pound, which Hurt said amounts to about $9.00/cwt. higher prices on a live hog. “Lower retail prices are moving more pork, and the pork producer is getting a higher percentage and a higher total value from the pork being sold,” he added.

For the rest of 2017, Hurt said there is room for retail prices to move even lower, and a higher percentage of that retail price will get back to the hog producer.

“Probably the biggest opportunity for hog producers is the advent of new processing capacity coming on line in the last half of 2017," he said. "The added competition for hogs will likely reduce the farm-to-wholesale margins, with much of that reduction bid into higher hog prices.”

In 2016, for example, the U.S. Department of Agriculture reported the farm-to-wholesale margin as 70 cents per retail pound, compared to 58 cents in 2015.

Hurt said export demand remains a positive factor for the 2017 hog price outlook as well. USDA expects a 4% increase in exports and little change in imports.

Pork supplies are not the reason for higher hog prices in 2017. “So far this year, pork production has been about 3% higher than for the same period last year,” Hurt said.

Live hog prices are now expected to average near $51/cwt. for 2017, up from $46/cwt. in 2016. Live prices are expected to average in the very high $40s in the first quarter, move to the low- to mid-$50s in the second and third quarters and then finish the final quarter in the mid-$40s.

Total costs of production for 2017 are expected to be near $50/cwt. live, similar to the annual forecast price of hogs. If this transpires, Hurt said pork producers will recover full costs of production in 2017. “Losses in the first and fourth quarters would be offset by profits in the second and third quarters,” he noted.

There also has been an overall improvement in prospects for animal and animal product prices since last fall, Hurt said.

“That is true for beef, pork and milk markets. The source of that improvement may well be related to the general improvement in the anticipated economic growth rates for the U.S.; think of the stock market increases since the election. These increases are largely based on anticipated policy that will stimulate the economy, including tax cuts, infrastructure spending and reduced regulations,” Hurt explained.

However, he said markets for animal products remain vulnerable to at least three outcomes that could differ from current optimism: (1) the anticipated economic stimulus is not implemented, (2) the strength of the U.S. dollar slows agricultural export sales from anticipated levels and (3) the U.S. moves in a direction of more protectionism that increases trade barriers and reduces agricultural export sales potential.

“Each industry is trying to figure out what the new Administration means for them. Agriculture incomes are importantly influenced by the domestic economy, by the global economy, by exchange rates and by trade. Agriculture, like other industries, must take a ‘wait-and- see’ attitude,” Hurt said.

Market recap

The April fed cattle futures market started the week strong but fell Thursday. Nearby contracts closed higher Monday and Tuesday at $115.50/cwt. and $117.925/cwt., respectively, but then declined to Thursday’s close of $116.15/cwt.

March feeder cattle futures followed the same trend. Nearby contracts closed higher Tuesday at $125.075/cwt. and then dropped Thursday to $123.45/cwt.

For the beef cutouts this week, Choice and Select were higher at $208.35/cwt. and $203.72/cwt., respectively.

April lean hog futures were mixed this week. Nearby contracts closed at $68.125/cwt. on Monday and closed at $68.275/cwt. on Thursday.

Pork cutout values were mostly lower Thursday. The wholesale pork cutout decreased to $80.16/cwt. Loins closed higher at $78.93/cwt. Hams and bellies closed lower at $53.74/cwt. and $143.92/cwt., respectively.

Hogs delivered to the western Corn Belt were lower this week, closing at $68.47/cwt. on Thursday.

USDA reported the Eastern Region whole broiler/fryer weighted average price at 87.64 cents/lb. on Feb. 24.

According to USDA, egg prices were steady this week. The undertone was mostly steady, while offerings were light to mostly moderate. Supplies were in a full range of light to heavy. Demand has been light to fairly good.

Large eggs delivered to the Northeast were lower at 55-59 cents/doz. Prices in the Southeast and Midwest were also lower at 56-59 cents/doz. and 48-51 cents/doz., respectively. Large eggs delivered to California fell to $1.08/doz.

For turkeys, USDA said the market was steady, with a steady to firm undertone. Offerings and demand have both light to moderate. Prices were unchanged at 98 cents to $1.05/lb. for both hens and toms.

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