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Back to earth: Hard landing?

While the remainder of the year will likely have challenges a little deeper than most are thinking now, it is not looking like a disaster…

Friday 15 September 2017 (6 months 3 days ago)

There is still a lot of uncertainty about how the remainder of this year will eventually turn out and how it will be remembered by producers but one thing is certain, the greater-than-expected profitability, which stretched from May through August, will make U.S. producers smile for quite some time. The unexpectedly high profitability came from a combination of remarkably stable and low feed costs coupled with record belly primal prices which drove the summer highs to levels no one anticipated. In addition, the sky-high belly price lingered into July causing the carcass price and producer profitability to hover near the seasonal peak almost a month longer than the normal seasonal allows. While the remainder of the year will likely have challenges a little deeper than most are thinking now, it is not looking like a disaster, more like a return to reality and a cushioned reality at that!

There is an old truism in the swine industry that you can get an idea about the average price for the year by looking to the October futures price. This is borne on the idea that the high price of the year occurs in the summer and the low price in December. Between the two we pass right through the middle of October. If that’s the case, we may have some rough waters ahead. The October futures peaked with the summer highs in late June, supported by the off-the-wall belly primal prices which raised the entire carcass price substantially. It came off that high in a normal fashion in July but since mid-August, it has dropped $10.00 in the carcass to around $62.00/cwt. This has caused what were breakeven opportunities and forecasts for December to deflate by $6.00-$7.00 per cwt. It is completely explained by the precipitous fall in belly primal prices which were over $200/cwt and now are just above half of that high.

Add to that, the July export picture showed some declines year over year and average weights took an unexpectedly high surge upward since the first day of September. September 1st five day rolling average carcass weight was reported to be 196.2lbs and just seven days later, the national average five day rolling average weight came in at just under 203lbs at 202.7. Six and a half pounds of carcass weight in one week is fast for a national average whose movements are muted by five-day averaging. We expect some gain from holding back hogs related to the short slaughter week due to the Labor Day holiday plus a fall-like weather pattern has set in across the Midwest with lower than normal high temps during the day, and very cool nights with low humidity. Still a pretty big jump.

Two new major slaughter plants are open now and will begin to take the three percent increase in production year-over-year which is hitting existing shackles. What many people forget about however, is that plants take some time to bring production up to full throughput and there is a learning curve which results in a higher than normal proportion of the kill being sold into wholesale markets at steep discounts due to miss-cutting and other processing defects. Don’t expect these plants to be paying top dollar in an environment of abundant hogs and shaky startup revenue. The plants are at their most vulnerable financially in the first six months and will not need to bid hogs up to get all that they need. Accounting and measuring systems are often a little quirky at the beginning too resulting in formulas and estimates being used to compensate producers when actual weight and quality measurements are unavailable. All of this is par for the course but don’t expect the new plants to be driving up the price of hogs to producers as their full kill was already anticipated a long time ago and is already “on the hoof”. In addition, they are opening at a time when hogs will be more than plentiful and seasonal demand for the BBQ cuts waning.

All this adds up to a bit of an uncertain future for producers. The saving grace of course is those low feed and energy costs which will save the day and help producers sail through the coming challenges with only a few nicks versus spilling gallons of red ink. Pork exports are forecasted by USDA to exceed last year but political events and trade deals being left open might change that picture some in the short run. All in all, it looks like a good time to begin freeing up some that space in the home freezer so that you have room to load up on some very good but very inexpensive pork in the coming weeks.

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