CIH Hog Margin Watch: July 2023

Margins slumped over the first half of July following a surge in projected feed costs as hog prices were flat to slightly higher in nearby expirations. After USDA released the revised acreage report at the end of June, corn prices were sharply lower in response to the surprise increase in planted area well above market expectations. Despite this, renewed forecasts calling for above-average temperatures and below-normal precipitation combined with Russia pulling out of the Black Sea grain initiative has injected fresh risk premium back into the market. Corn prices rallied 80 cents/bushel from their low earlier this month while soybean meal prices have likewise risen sharply after USDA cut the soybean acreage figure and featured a tighter balance sheet in the July WASDE. Hog prices have experienced some support on the front end of the curve due to strength in the pork cutout as the spot market tightens. The pork cutout has increased about $22/cwt. or 26% over the past month with the belly primal contributing about 50% of that gain as it recovered from extremely depressed levels earlier this spring. The belly primal has rallied from a low of $74.01/cwt. the week of May 24 to $192.63/cwt. in the most recent week,
an increase of 260% as buyers scramble for spot supplies. Meanwhile, although the back end of the curve has been more subdued, increasing sow slaughter has been a recent feature as producers respond to deeply negative spot margins. Sow slaughter for the week
ending July 15 totaled 67,000 head, up 3.5% from the prior week and 11.7% above the same week last year. Our clients have benefited from recent adjustments to strengthen feed coverage and continue to monitor opportunities for strategic adjustments to existing positions.

The Hog Margin calculation assumes that 73 lbs of soybean meal and 5.3 bushels of corn are required to produce 100 lean hog lbs. Additional assumed costs include $44 per cwt for other feed and non-feed expenses.