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WIKI ANALYSIS
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This article describes a commodity traded on a commodities exchange. View articles referencing this commodity. |
This article is about Pork Prices in general. For the specific commodities, see Lean Hogs Prices and Pork Bellies Prices.
With 42.6% of total worldwide meat consumption, pork is the most widely eaten meat in the world.[1] In 2007, the retail value of all US produced pork was $48.5 billion.[2] Fresh, unprocessed pork is traded on the Chicago Mercantile Exchange as frozen pork bellies (what bacon is made from) and lean hogs (every other cut of meat).[3] Pork prices depend in part on the availability and pricing of feed, as feed represents between 50 and 85% of the cost of hog production.[4] For example, heavy flooding reduces land available to plant corn and soybeans, so pork prices drop slightly as more hogs are slaughtered and sent to market. Reliance on corn hog feed (especially distiller's dry grain--see DDG under Ethanol Production) also makes pork prices susceptible to significant changes in corn prices.[5]
The chart at left shows continuos front-month futures prices for Frozen Pork Bellies traded on the Chicago Mercantile Exchange.
Pork Bellies vs. Lean Hogs
In common usage, discussion of Pork Prices is in terms of either Pork Bellies Futures or Lean Hogs Futures. Pork Bellies are the part of the pig from which bacon is derived after the meat has been processed. Lean hogs are the rest of the carcass, from which all other pork products are derived. (See this video for a description of how pork bellies are converted into bacon.)
Of the two contracts, speculators will tend to follow the prices of Pork Bellies more closely, with Lean Hogs used almost exclusively as a hedge by producers and consumers of Pork.
Who benefits from higher pork prices?
- Smithfield Foods (SFD); Tyson Foods (TSN); and Brazilian JBS S.A., owner of Swift Foods, are examples of major public pork protein processors (they hold 26%, 17%, and 11% of US market share, respectively) that benefit when pork prices rise.[6] These companies contract out raising the pigs to smaller farms, then slaughter, process, and sell the pork meat on the commodities market, making their earnings dependent on pork prices.
- Smaller, private pork producers and processors, such as Cargill Meat Solutions, with 8% of US market share, also benefit when pork prices rise.[6]
- Novartis AG (NVS), Alpharma (ALO), and other manufacturers of livestock pharmaceuticals benefit from higher demand for swine, which results in increased demand for the high-yield drugs that these companies manufacture.
Who benefits from lower pork prices?
- McDonald's, Burger King, Wendy's, Carl's Jr., and Chipotle Mexican Grill (CMG) are examples of fast-food chains that purchase extremely large quantities of pork and are highly affected by fluctuations in pork pricing. McDonald's (MCD) alone buys 250 million pounds of pork a year.[7]
- ConAgra Foods (CAG) and Kraft Foods (KFT) are packaged food producers that also buys large quantities of pork. When pork prices rise, these companies are unable to completely pass on the price increase to consumers due to competition in the meat industry and consumers' increasing sensitivity to food prices and their willingness to trade down to less expensive foods during times of rising prices.[8]
- Supermarkets such as Wal-Mart Stores (WMT) (the largest buyer of pork in the United States,)[9] Safeway (SWY), and Kroger Company (KR) are examples of companies who purchase large quantities of fresh and packaged pork and benefit from lower pork prices because of the stickiness - tendency for prices to "stick" at a certain price point - of pork prices.
Trends and Forces
USDA Forecasts of Pork Production and Market Price:
Increase in Feedstuff Prices Increases the Price of Pork
Pork prices are heavily dependent on favorable pricing of feedstuffs, such as corn prices and soybeans, as food makes up the majority of the cost of raising livestock. During the commodities spike from late 2007 to the middle of 2008, corn prices rose sharply - from $3.50 in December 2007 to $7.50 a bushel in June 2008 - before falling back to $4.10 a bushel in October 2008 as ethanol producers increased their demand for the commodity (rising oil prices, in turn, have increased demand for ethanol).[11][12] Corn is also the main input for many other food products such as high fructose corn syrup that are in increasing worldwide demand - but nonetheless the USDA expects U.S. farmers to plant 8% less corn in 2008, lowering supply and increasing prices.[13] Traders use the corn-hog ratio as a quick tool for determining hog margins and predicting future price.[14] The corn-hog ratio is the price relationship between one bushel of corn and 100 lbs (1 cwt) of live market hog.[15] The benchmark is 1:12. If the ratio is less than 1:12, it is estimated that hog production is unprofitable; above 1:12, profitable.[15]
Shrinkages in the Breeding Herd Will Decrease Supply and Increase Prices
In order to counteract rising feed costs and an oversupply in the market, farmers are planning to decrease the breeding herd - the number of sows expected to give birth - down 4% in 3Q2008.[16] Although this will increase supply in the short term and lower prices, it will decrease supplies by 5% in the spring, pushing prices higher.[16]
Rising Global Demand Pushes Up Pork Prices
In 2007, consumption of pork, chicken, and beef rose at an annual rate of 5% in developing countries.[17] From 1990 to 2007, per capita consumption of meat doubled in China - 1.3 billion people ate twice as much meat as they did before.[18] As global demand increases, prices are pushed up and meat becomes more expensive.
Ways to invest in Pork
- Traded on the Chicago Mercantile Exchange (CME), frozen pork belly futures and lean hog futures provide a way to manage hog pricing risks and arbitrage between grain and meat prices. One contract is 40,000 pounds.[19] [20]
- ETFs, such as the commodity index tracker PowerShares DB Commodity Index Tracking Fund (DBC), provide a way to gain exposure to pork prices without actually having to own the pork itself. However, ETFs like this that track a broad commodity index also expose investors to other commodities such as corn or crude oil, which may not move in the same price direction as pork.
Pork Industry Market Share
Smithfield Foods (SFD) is the largest US pork processor, with approximately 26% of the United States market by volume of pork processed.[21][22]
Tyson Foods (TSN) is the second largest US pork processor, with approximately 17% of the United States market by volume of pork processed.[21] Swift Foods, which is owned by Brazil's JBS S.A., is the third largest US pork processor, with approximately 11% of the United States market by volume of pork processed.[21]
Cargill Meat Solutions is tied as the fourth largest US pork processor, with approximately 8% of the United States market.[21]
Hormel Foods (HRL) is tied as the fourth largest US pork processor, with approximately 8% of the United States market.[21]
Pork Futures
References
- ↑ The World's Most Widely Eaten Meat.
- ↑ 2.0 2.1 USDA Livestock Projections to 2017.
- ↑ Commodity Products.
- ↑ John McGlone, McGlone, Wilson G. Pond. Pig Production.
- ↑ [1] Corn Prices Near Record High, But What About Food Costs?
- ↑ What's Up, Mac?.
- ↑ Chicago Business, "Kraft, Sara Lee face rising beef and pork prices"
- ↑ Pork Commentary: Nice Hog Price Rally.
- ↑ FutureSource "Futures & Commodities Quotes, Charts, Analysis, and News
- ↑ [2] National Corn Growers Association Futures Quotes
- ↑ Wikinvest Corn Prices.
- ↑ [3]|"USDA Bets on Soy, but Farmers Like Corn"
- ↑ Global Futures Group "Feed Ratio"
- ↑ 15.0 15.1 University of Kentucky: College of Agriculture "Animal Agriculture in the United States"
- ↑ 16.0 16.1 Pork Price Boom.
- ↑ [4] More wealth, more meat. How China's rise spells trouble
- ↑ [5] Meat demand in Asia fuels higher food prices
- ↑ Frozen Pork Bellies.
- ↑ Lean Hogs.
- ↑ Pork Producer Says It Plans to Give Pigs More Room.
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