Harrington's Sort & Cull
John Harrington DTN Livestock Analyst

Friday 09/21/12

Banking On Greed

Clearly, "greed" is no 4-letter word -- especially when it comes to the efficiency of relatively free markets.

Pope Gregory didn't do this volatile but important engine of production any favors in the 6th century when he placed it on his checklist of seven deadly sins. Talk about a major bummer for early pioneers of capitalism.

But you can't hold a good idea down for long.

It wasn't long before a system of indulgences transformed greed from naughty to forgivable to darn right saintly. And once the entrepreneurs of Protestantism successfully fused it with a righteous work ethic, the devil didn't know what hit him.

Believe it not, these thoughts came to me this morning when a reader asked about next week's hog market. Did the mid-September rally really have legs, or was it just a one-trick pony?

"It depends how greedy packers wake up on Monday."

Judging by the awkward silence, my answer must have sounded more disparaging than I intended.

Maybe it would have been more politically correct to say "it depends how aggressively processors choose to mine diminishing profit opportunities."

At any rate, here's what I meant.

Thanks to a combination of surging market hog supplies and relatively strong third quarter pork demand, packing-house incentives have been rocketing higher since midsummer. Just last week, gross packer margins averaged $38 per head (i.e., implying a net of $25 plus).

Trust me, the Federal Reserve is not the only outfit printing money these days. It's no wonder that September weekly slaughters have been stoked to exceed 2.4 million head for the first time in history.

But as the third quarter begins to draw toward a close, something of significance seems to be shifting in the market force. After weeks of effortless procurement using lower and lower prices, hog buyers are actually being required to chase the country market higher.

Negotiated dressed sales advanced this week by more than $3. While the reversal wasn't huge, it surfaced at a time when seasonal offerings typical get bigger, not smaller.

Couple this turnaround with bullish news from the Iowa scale house. Last week barrows and gilts averaged 268 pounds, 1.6 pounds lighter than the previous week and actually falling below the prior year for the first time since the early fall of 2011.

It would appear that the late summer pain of shipping-hogs-first-asking-price-questions-later endured by defensive pork producers has finally worked to pull numbers forward and thereby less total tonnage potential.

Enter Mr. Greed.

While processing margins took a pretty good haircut this week, profit potential remains quite good. But if packers attempt to keep production in high gear (i.e., close to 2.4 million), they may be forced to chase the cash hog trade even harder next week.



Posted at 4:39PM CDT 09/21/12 by John Harrington
Comments (2)
Iowa pork producers should find this a heartening tome. We will look forward to the sequel.
Posted by Ric Ohge at 9:49AM CDT 09/24/12
Peaked in and dairy farmers sitting with them in the tomb.
Posted by Frank Thomas at 8:04AM CDT 09/26/12
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