January 23, 2009

Pork- packer margins for 2008 were greatly improved over 2007 margins but declines in wholesale pork and byproduct values in late 2008 pressured pork-packer margins to levels not seen since 2005.

The price spread provides an estimate of packer gross margin however it does not represent actual packer profitability, as the spread does not consider any packer direct or indirect costs.

Seasonally, pork packer margins are largest during the fall due to increased numbers of slaughter hogs.

However in 2008, the availability of more slaughter hogs coupled with record high byproduct values supported packer margins to record highs during the third quarter.

On a monthly basis, the spread was at its widest during the third quarter hitting US$25.94 per hog in July, US$26.87 per hog in August, and US$21.89 per hog in September.

The last time packer margins were in that range was in 1998 and 1999. The run-up in packer margins in 2008 was mostly attributed to the byproduct value, which skyrocketed to record highs last summer due to spillover demand from the oil markets as well as surging export demand.

By the fall of 2008, a number of economic factors like the recession and a much stronger US dollar resulted in a drastic decline in the byproduct value as well as wholesale values for pork items such as ham.

As a result, estimated pork packers margins tumbled in late 2008 falling to US$10.86 per hog in November and averaged just above US$10 per hog in December.

From the high set in July to the low of December, the live to cutout spread fell by over US$16 per hog.

Nevertheless, for the year pork packer margins averaged 11 percent higher than 2007's and 23 percent higher than the 2002-06 average.