Packer Gross Margin
Packers no doubt had a historical run of profitability. Over the last few years some of the best margins ever. At times around $70 per hog but many weeks in the $50 range. It was a good time to be a packer.
We have never subscribed to the view that the good margins would last forever. We subscribed to the life thought: “What goes up goes down”. Put it another way “Everyone has a turn in the wheel barrow.”
Some Farmer Arithmetic:
- Last Friday U.S. Pork-Cut-outs = $110.46
- Last Friday National Weighted Hog Average = $112.49
Of course there are different hog prices but we think National Average is a reasonable one to use.
The jyst is the hog price is higher than the Pork Cut-out price. That would mean packer buys hogs for $112.49, kill them, cut them and sell pork for $110.46. Packers get to do everything and lose money. Now they are like producers who have produced hogs for a loss for too many times over the last 5 years.
Of note; last week some packers were paying up to $120 for spot hogs to fill shackles.
In our opinion the sales departments are dominant in packing organizations. The drive to have product to fill retail orders (maintain shelf space- food service- export orders) is a dominant driver in most if not all packers.
Packers we believe have been caught flat-footed in regards to 2021 pork supply. U.S.D.A until last month predicted more pork in 2021 then 2020. Then of course there were the Chicken Littles. Below from September 2020 Iowa Pork Producer Magazine:
Chicken Little 2
“It’s the shackle space that will dictate pig prices moving into the future, not the pig supply. With that, he said it will likely be 8-10 quarter before the profit picture looks much better.”
Chicken Little 3
“While he also thinks the pork industry doesn’t see a full recovery until at least 2022.”
We all want to hear what we want to. U.S.D.A. says more pork in 2021 then 2020 (hog prices in 2020 were terrible). The Chicken Littles – no recovery until 2022 or beyond.
No wonder when producers are looking for renewed contracts there was a resistance. Packers were led to believe by a collection of “experts” that hogs would keep coming despite producers losing hundreds of millions of dollars. Packers heard what they wanted to.
We are now selling hogs probably bred last July. Since then the U.S. sow herd has continued to decline, meaning even fewer hogs on the horizon. There is next to no new sow units being built. It’s a level lower than we ever seen in the industry. $7.00 corn is not going to stimulate expansion. We believe we are at point weekly hog numbers are going to plummet further. Hog weights are dropping fast now to sustain weekly kills; weights will continue to drop.
We suspect the packers with large number of their own hogs will be the most aggressive chasing hogs in the near future. They will probably use the base to punish and try to grab market share from some of the competitors.This activity would push hog prices to Cut-out levels for a significant time. The Golden Age of Big Gross Packer Margins we suspect will be gone for significant time.
It’s the producers turn in the wheel barrow.