Pork-packer margins plunge in late 2008
January 21, 2009
by Bryan Salvage
LAKEWOOD, COLO. — Pork- packer margins for 2008 were greatly improved over 2007 margins, however, declines in wholesale pork and byproduct values in late 2008 pressured pork-packer margins to levels not seen since 2005, according to the Livestock Marketing Information Center.
LMIC relays that seasonally, pork-packer margins are largest during the fall because of an increase 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 $25.94 per hog in July, $26.87 per hog in August and $21.89 per hog in September. The last time packer margins were in that range was in 1998 and 1999.
According to LMIC, 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.
However, by the fall of 2008 economic factors, including the recession and a much stronger U.S. dollar, resulted in a drastic decline in the byproduct value, as well as wholesale values for pork items such as the ham.
As a result, estimated pork-packer margins tumbled in late 2008 falling to $10.86 per hog in November and averaged just above $10 per hog in December. From the high set in July to the low of December, the live to cutout spread fell by more than $16 per hog. Regardless, pork packer margins for the year averaged 11% higher than 2007’s and 23% higher than the 2002-2006 average.
LMIC explains that the difference between the purchase price of a slaughter animal and the cutout value (wholesale value) plus the byproduct value (total sum of all non-meat items) is known as the live to cutout price spread. 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.
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