JIM LONG'S PORK COMMENTARY

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November 6, 2006

By Jim Long, Senior Vice-President, Genesus Genetics

US Lean Hog Prices Remain Strong

Lean hog prices made small gains last week with Iowa-Minnesota averaging 63.51 lean Friday (47 cents lb. live weight) up from the previous Friday’s average of 62.16 lean.  Pork cut-outs showed a similar upside averaging 67.49 last Thursday compared to the week’s before 67.06.  US market numbers for the week of 2.181 million were up from the previous year’s 2.140 million.  Certainly lots of hogs.  Packers are able to run plants wide-open with reasonable margin.  Good times – both packer and producer are making money at the same time.

The downside for producers buying feed and not hedged is that many will have breakevens around 60 cents lean (45 cents live weight).  We are basing this on breakevens we have seen that show 2005 average farrow to finish breakevens of 41 cents/lb live weight.  The current corn price increase of $1.20 to $1.50 a bushel compared to a year ago will increase the breakevens 4-5 cents per lb or to 45-46 cents per lb live weight.

Recently will be involved in projections showing new sow barns producing early wean pigs with current feed prices indicating breakevens of $34-35 per pig weaned.  Considering that in 2005, the average early wean sold for around $34, it will take a lot of capital and courage and/or a heck of a good early wean contract to get many new barns built.  The bottom line is a new price list will have to be established in these cost circumstances.

Canada-USA Marketings

Last week, we discussed the fact that the Canada-USA combined market inventory in September was 6,000 head lower than a year ago.  No change.  Year to date combined slaughter indicates that the lack of expansion is just part of a trend seen all year. 

Combined US-Canada Slaughter
Year to Date October
Thousands

	2005	2006
United States	83,901	84,663	+0.9%
Canada	16,697	16,306	-2.4%
YTD	100,598	100,969	+0.3%

Year to date, Canada and the US have slaughtered about 8,000 head more per week this year compared to last.  In the big picture, a next to irrelevant difference.  The September combined market inventories indicate this trend to continue.  A year ago, the Iowa-Minnesota lean price was hovering around 58 cents lean.  Currently it is 63cents.  The 5 cents lean difference is $10 per head (200 lb carcass) and goes a long way to cover most of the feed price increase.

We have been called bullish for too long.  We know being continually bullish makes many uneasy.  The fact is that we see no reason in the next year to see a downside to prices.  There are no more hogs.  There is no expansion.  We see lean hog prices averaging 70 cents lean (50 cents live weight) through next August.

Competing Meats

Chicken
Recent egg sets for chickens are around 3% lower than a year ago.  Feed prices are eating into chicken integrator’s margins.  With year to date chicken slaughter +0.2%., we have no more chicken and integrator’s margins being challenged by higher feed prices.  We do not expect increased chicken production in the next few months and this is supportive for hog prices.

Cattle
There are record cattle on feed (+10%).  Short term, we expect lots of beef coming to market.  Double corn prices and 8 to 1 feed conversions in the cattle industry are whacking feed lot margins.  Feed lot placements are declining.  Cattle will be kept in pasture longer (if pasture available).  Slaughter weights will probably decline.  In about 5 months, we will probably have less beef coming to market year over year.  Price supportive for hogs when this occurs.

Conclusion:
High corn prices will limit meat production.  In cattle, poultry and hogs, slaughter weights will stop increasing and in likelihood, decline.  High corn prices will encourage feeder adjustment and tighten ration formulizations.  Corn exports will decline as importing countries adjust to new prices and their consequences.  We would not be surprised by a 12-13 billion bushel US corn crop as farmers shift set-aside land and other crops to corn in 2007.  The saying ‘the surest cure for high prices is high prices’ comes to mind, especially when the US corn producer is back-stopped by generous government price-support programs.

“Revolution means turning the wheel.”
                                                                                    ----Igor Stravinsky