Packer Margins Created on May 22, 2018
If we look at U.S. hog volume and packer capacity trends throughout the years, the highest margins typically occur in the fall months when hog volumes match – or trend closer to – capacity. Lower margins typically align with summer months when packers pay more to keep plants full. Similarly, as new U.S. packer capacity comes online, packer margins will strain to draw hogs to fill plants.
Graph 1 illustrates eight years of estimated packer margin data, showing the last three years as exceptionally high. Looking at the difference between Carcass Cut Out and Hog Cost, there has been an average $13.67 packer margin since the beginning of 2015 ($10.36-2015, $15.56-2016, $15.10-2017). Through the previous 16 years (1998-2014), margins averaged $4.22 overall, with the highest annual averages of $7.40 in 1999, $6.44 in 2014 and $6.30 in 2002.
Reviewing U.S. hog volumes and packer capacity from the last few years, we can see that hog volumes overcame PED in 2014, averaging 102% growth per year between 2014 and 2016. Capacity lagged with almost no growth (100.04%) during the same time frame.
In Graph 2, it is worth noticing that new packer capacity that came online in 2017 (108% of 2016) hasn’t yet been met by the growth in hog volume (103% of 2016). With additional capacity predicted for fall 2018 (+40,000 head/day) and 2019 (+50,000hd/day), it is likely that U.S. packers aren’t filling shackle space as readily as they have in recent years. This could indicate a return to more traditional packer profitability alongside new growth. Recent data does show a mild tightening of packer margins. During the last four weeks, the spread between the USDA Carcass Cut Out and the Hog Cost was $9.89/hundredweight (cwt) compared to $16.43/cwt during the same four weeks in 2017.