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Market hog prices drop to six-year low

By Staff | Jan 3, 2016

URBANA, Ill. – Live hog prices fell below $40 per hundredweight last week.

According to Purdue University Extension economist Chris Hurt, this means hog prices are at their lowest level since November 2009. The source of the current downturn in prices has components from both supply and demand.

“Abundant supplies of pork are easy to find,” Hurt said. “Pork production this year is up 7 percent with the number of head processed up 8 percent and weights down 1 percent.

“There is more competition with per capita chicken supplies, which are up nearly 7 percent, and even per capita beef supplies are up near 1 percent.”

The pork and beef trades are additional culprits that added to the poundage of meat in the U.S. market this year, Hurt said. “Total pork imports are up 15 percent so far this year, primarily due to Canada sending more pork south.

“The reason is that the strength of the U.S. dollar tends to stimulate more imports and reduce U.S. agricultural exports.”

Over the past year, the U.S dollar has appreciated 18 percent relative to the Canadian dollar. In addition to more pork coming from Canada, the strong U.S. dollar has also stimulated Canadian producers to ship nearly 550,000 more live hogs in the January to September period, 15 percent higher than the same period last year.

“So although domestic pork production is up 7 percent,” Hurt said, “there is about 10 percent more pork available when the added imports and fewer exports are considered.

“A similar impact is occurring for beef where imports are up sharply this year and exports are down.”

Hurt said he believes the weakness in demand may have been affected by the World Health Organization’s October announcement linking bacon and processed meats to cancer in humans and generated considerable media coverage in the weeks that followed.

Just prior to that announcement, live hog prices were $52 per live hundredweight and are currently about $38, just four weeks later.

Over this short period, wholesale prices for hams fell 6 percent, loins were down 12 percent, and the wholesale bacon price is down 32 percent.

“I also heard reports from packers that pork product sales and shipments began to immediately drop, causing pork product inventories to grow at the packers and thus encourage packers to drop hog bids,” Hurt said. “Lean hog futures fell $10 to $12 per lean hundredweight on nearby delivery contracts in the three weeks after the announcement. In the past week, nearby futures contracts have recovered about $4 of that decrease but remain $5 to $7 below pre-announcement levels.”

What is the impact of the WHO announcement? Hurt says that there is likely to be a short-term and a long-term impact.

“In the short run, as the event is getting coverage in the broad media, the impacts can be large,” Hurt said. “However, in the longer run, media attention tends to drop off.

“In addition, we know that announcements that suggest a negative human health impact to consumption of certain agricultural products are relatively common and consumers are somewhat conditioned to them.

“Thus, over time, the issue will have less of a negative impact. In the longer run, food consumption tends to be based strongly on habit, so changes in food consumption in the entire U.S. population tend to change slowly over a number of years.

“This means that consumption tends to recover after the initial shock.

However, if there is persistence of those messages in coming months and years, this can set in place a long-term change in consumption patterns.”

Estimated costs of production have dropped to near $50 per live hundredweight, with the most recent reductions coming from lower soybean meal costs.

Hog prices are expected to recover into the low to mid-$40s in December and for much of the winter. Spring and summer prices in 2016 are expected to move upward to the lower $50s and finish the year in the mid to higher $40s.

“Hog production has dropped into losses with the eroding prices over the past month,” Hurt said. “Losses are expected to be $18 to $20 per head in the last quarter of 2015 and the first quarter of 2016.

“Seasonally higher hog prices in the second and third quarters next year should mean profits of about $3 per head, followed by losses of $14 a head in the final quarter of 2016.

“For the 2015 calendar year, my estimates are that the industry lost about $3 per head and that losses in 2016 will be $6 to $8 per head.

“There certainly is a reasonable probability that hog prices have been excessively depressed after the WHO announcement.

“If prices can continue to recover in coming months, this could narrow the current expected losses for next year.”

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