May 03, 2020
What is the best way to determine the fair market value of a pig? This seemingly innocuous question has resulted in a multitude of opinions over the years as market dynamics, participants, and trends change. As the volume in the negotiated market has dwindled, some market participants have noted the rise in the use of cutout-based contracts to price hogs. But given the large amount of information published by USDA on a daily basis, how is the carcass cutout calculated and what can be gleaned from the various cutout reports?
Wholesale pork reporting as part of the USDA’s Livestock Mandatory Reporting Program (LMR, or oftentimes referred to as MPR) began in 2013 at the request of industry participants. USDA AMS publishes four daily and eight weekly pork reports from their Des Moines office by analyzing 8,000-10,000 records per day. These reports cover approximately 87% of total pork sales. All packers slaughtering more than 100,000 head of barrows and gilts (or more than 200,000 head of sows and/or boars) annually are required to report the prices and quantities of all wholesale pork sold prior to the established reporting times to USDA twice daily.
The pork carcass cutout value is a calculation of the approximate value of a carcass based on the prices received for its respective components. The USDA’s pork carcass cutout value is the estimated value of a standardized 55-56 percent lean, 215-pound carcass based upon industry-average cut yields and average market prices of sub-primal pork cuts. In other words, weighted average prices of individual items are used to calculate a weighted average value for primal cuts. The primal cut values are then used to calculate a carcass equivalent value. USDA surveys packers in July and updates the cut yields the following January if necessary. The current yields can be found below. The loin primal constitutes the largest share of the cutout value, followed by the ham, and so on.
While it is important to understand what is included in the cutout calculation, it is also vital to understand what is not. Not included in LMR reports are carcasses, some variety meats (including ears, hearts, blood meal, cheek meat, and heads), some processed items (including bacon, sausage, ground pork), case ready items, and intracompany sales.
The National Weekly Comprehensive Pork Report (LM_PK680) includes the comprehensive value and volumes of all reported wholesale pork trade with the exception of specialty pork product and is a great resource, but unfortunately did not begin until May 23, 2019. Its use for looking at long term trends is therefore limited but is an important report moving forward. One last note—FOB plant prices are as reported by the packers at their dock before transportation costs have been added. USDA also publishes FOB Omaha prices series, which are an antiquated data set that include a freight adjustment based on the distance from the reporting plant to Omaha, Nebraska. Most market participants utilize FOB plant for formulas and analyses today, of which USDA AMS publishes four national weekly pork reports:
Each load reported in the cutout reports represents 40,000 pounds. Formula pork sales reported on the LM_PK620 report represented about 53.2% of all reported pork wholesale volume in 2019, followed by negotiated sales (25.3%), export sales (11.4%), and forward sales (10.0%).
As exports play an ever-increasing role in price discovery, an often-overlooked source of information is included in the LM_PK640 report. This data has the potential to provide an indication of export demand developments well ahead of the official figures from the U.S. Census Bureau. A single data point does not make a trend, but it is interesting to note that during the first week of the Phase One trade deal with China, the weekly volume reported on the LM_PK640 report was the 5th highest since the beginning of 2014. This data is released on Monday mornings for the week preceding, as opposed to the FAS Weekly Export Sales reports which are released on Thursdays for the week ending the preceding Thursday and official export figures which are lagged by at least five weeks.
Because a spike in volume on the LM_PK640 report could indicate robust demand, forward domestic volume as measured by the LM_PK630 Forward Sales report can, and oftentimes is, also impacted. For example, amidst robust export pork sales beginning in late September and lasting through mid-November, a perceived forward market shortage sentiment developed among participants. As a result, forward wholesale pork sales volume also posted all-time highs for the data series.
This competition for securing physical led to a counter-seasonal rise in the cutout during a period of record-breaking hog slaughter, as can be viewed below. The first chart demonstrates how the cutout typically declines from a time period beginning in the summer months into the holiday season. In 2019, however, the negotiated cutout value increased by more than 27% from September through mid-November.
The pork carcass cutout calculations produced by USDA AMS provide utility to market participants and offer context to marketplace fundamentals. Utilizing these reports may reveal perceived strength or weakness in cutout sales and provide glimpses of market conditions ahead of other more frequently leveraged data sources. As producers continue to search for the best method to determine a fair market value for their animals, it is important to understand the difference between the various cutout reports, what is included in their calculations, and what is omitted. These reports are another essential tool to employ to obtain greater clarity in an ever-dynamic, evolving marketplace, gather clues into forward demand, and potentially leverage to take control of your bottom line.
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