Pork Commentary, November 18th 2019
Jim Long, President-CEO, Genesus Inc.
U.S. Pork Cut-outs Surge!
Who would have thought on a week in November U.S. pork cut-outs would hit 90.12₵ lb. in the midst of record slaughter (last week 2,749,000).
Pork isn’t 90₵ because buyers want to pay more. Considering the record hog numbers it must truly be a reflection of demand. U.S. Pork Cut-Outs are now are now 15₵ lb. higher than a couple weeks ago, which has increased gross packer margin $30 per head.
If you use a 90₵ cut-out and 60₵ lb. for market hogs, the spread of 30₵ lb. must be approaching an all-time high for gross packer margin.
Last Saturdays hog slaughter was 348,000 up from 244,000 the week before. A sign there are hogs to slaughter but also packer margins that justify overtime pay for Saturday’s plant employees. Being a producer we wish the hog price was higher, but we are glad U.S. pork cut-outs are in the 90₵ lb. range. That price gives room for rapid hog price increases.
We expect that Export demand is excellent. China and other countries are upping their purchases. It really helps that Canada can now once again ship to China. It is expected Canada could sell $1 billion of pork to China over the next twelve months. That Pork will thus be out of the North American domestic market.
Last week China announced that after a five year ban on importation of U.S. chicken the trade could begin again. U.S. government officials estimate the market could be worth $1 billion over the next year. The move is a reflection of China's need for meat protein to fill the Black Hole created by African Swine Fever. All chicken that goes to China leaves the U.S. and will mean less protein for U.S. consumers which will support chicken and ultimately pork prices.
To sell to China no Ractopamine (paylean) can be fed. The importance of JBS and Tyson to ban Paylean by the first of January (180,000 head combined a day) can-not be overstated. This will create a huge source of more pork for China. Both companies pulled Paylean out for no other reason than the recognition of potential sales to China.
Watch U.S. pork sales ramp up further to China in early 2020.
Currently Hogs in Europe are bringing about 75₵ U.S. lb. liveweight. In the U.S. the price is 45₵ lb. liveweight. A 30₵ lb. spread. The big difference is the huge amount of pork they have been sending to China, which subsequently get it out of their domestic market.
Recently we read an article where the Euro price of pork was financially damaging their processors. There has been discussion about government financial support to processors? A lot different scenario than what is going on in North America.
This past week we had meetings with customers and prospects in Canada and the U.S. Collectively, 160 people. Our take home message from them is “When is this going to get better? We have had enough!” There is real anger from independent producers that they believe Packers are not sharing the pork pie. This will happen when one side is losing money i.e. producers.
For what it is worth we expect the current gross packer margin will be short term. As slaughter numbers decline seasonally, gross packer margin will decline. If cut-outs stay high or go higher, hog prices will chase them fast.
Summer futures are around 90₵ lb. Pork cut-outs are already 90₵ lb. It’s not insane to think Pork cut-outs can blow past $1.00 as hog supply seasonally drops, Tyson & JBS ramp up China Pork shipments, on top of Canada’s pork to China and now chicken leaving the U.S. to China. Historically high hog prices lead to low packer margins.
Maybe we are optimistic, but China hasn’t added U.S. chicken and Canada Pork to list of protein sources the last 10 days for no other reason than to fill their protein Black Hole. A hole that will need to be filled for a minimum of two years.