July 3, 2006

 

US pork prices climb to 18-month highs

 

 

Pork prices have risen 17 percent in June, one of the biggest gains in modern history to reach 18-month highs, Barrons reported on its financial website.

 

Although prices have fallen a bit in the last week, the cost of pork is expected to remain elevated through the summer at least.

 

The recent price jump has been powered by a surprising 3 percent drop in hog slaughter; analysts had expected a slight rise above year-ago levels.

 

Among the many factors reducing the US figure: Breeding problems last summer resulted in fewer births; an outbreak of disease drove the mortality rate above typical levels last fall and winter and a 16 percent rise in export aided by the weaker dollar all conspired to tighten domestic supply.

 

Some of the shortfall is a matter of timing. For instance, a new hog-processing plant added capacity earlier this year, causing lesser animals in the open market.

 

Gains in lean-hog futures prices on the Chicago Mercantile Exchange have also put upward pressure on cash prices.

 

Mike Zuzolo, an analyst with advisory firm Risk Management Commodities, says that commodity funds' long futures positions have been supporting higher cash prices since spring. The funds have increased their buying on the expectation of a long-term jump in demand from China and other emerging-market countries. Rising prices tend to attract added speculative interest as well.

 

This buying interest, further stimulated by the gains seen in the cash markets, helped futures rally in June to their highest point since May 2005.

 

The surge in cash hog prices has been "supply-driven, in our opinion," says Bob Wilson, analyst with Denver-based HedgersEdge.com.

 

Although hog supplies tend to decline going into spring since conception rates drop in the heat of the summer (swine have a roughly four-month gestation period, and then it takes about 6 1/2 months for the pigs to reach a size suitable for slaughter), the drawdown in USDA's March forecast compared with December's outlook was more severe than normal, he says.

 

Wilson expects supply to continue to dwindle until at least mid- to late-July. Meanwhile, domestic demand for meat -- pork, as well as beef and chicken -- is slightly down overall for the first four months of 2006. But certain pork cuts' popularity tends to rise in summer due to barbecues.

 

At present, packers are using hogs of lighter weights, meaning there are fewer animals available at preferred weights, another suggestion of a tight marketplace. This situation will support higher prices even longer, Wilson says.

 

During the week ended June 16, the average hog weight fell to 4.3 pounds below year-ago levels, the largest decline in a year-over-year weekly figure since September 1995, according to University of Missouri economist Glenn Grimes.

 

The weight average has run below year-ago figures for six consecutive weeks, and a seventh straight shortfall is expected.

 

Despite the recent pressure on prices, analyst Wilson says "pork is still relatively cheap" compared with beef. Beef prices would have to break to bear any significant price pressure on pork, he noted. One other important factor: Protein sales generally have disappointed this year, which many attribute to sky-high gas prices.