By Curt Thacker

  Of DOW JONES NEWSWIRES


  KANSAS CITY (Dow Jones)--A steep rise in cash hog prices and floundering
wholesale pork values have resulted in deeply negative fresh pork processing
margins.

  Last week alone, the Midwest direct hog markets gained from $6.75 to nearly
$8.00 per hundredweight on a dressed basis, according to the U.S. Department of
Agriculture's daily market reports. The USDA's pork carcass composite value,
however, fell $1.09 for the week and on Friday hit a nine-week low, the next
lowest of the year at $55.26.

  The Dow Jones Newswires packer margin index, an indicator of packer
profitability, for Friday was at minus $19.64 per head. This was the largest
negative margin figure on a daily basis since the index was initiated more than
five years ago. It was also likely the largest negative margin in history,
according to analysts.

  But this discrepancy is unlikely to last as most market analysts, brokers and
livestock dealers expect hog prices through the balance of March to be
relatively flat or to decline modestly while awaiting a rally in pork prices.

  Seasonally pork packer returns were typically the lowest from May through
July between 1995 and 2003. Analysts said the tight summer margins were mainly
due to reduced supplies for slaughter-ready animals. In four of the past six
years, however, the daily margin index has been the lowest at other times of
the year, mainly from December through March.

  Market analysts said leveling of the seasonal production cycle has occurred
in the pork industry with the growth of indoor production facilities and
reduced exposure by the animals to weather and temperature changes. Hogs breed
and grow the best when temperatures are cool to moderate. They don't perform as
well when temperatures are either very hot or extremely cold.

  Other factors such as volatile grain prices in the past year, varying export
sales commitments among packers, and differing approaches to the market by
vertically integrated processors versus the traditional non-producer packers
may also play a part in the changes in pork processing margins, analysts and
livestock dealers said.

  The industry and market prices have been adjusting from a period of high
demand for pork and other meats in the past few years to slowed demand now due
in large part to a backlash from the economic crisis. Export sales as well as
domestic demand have slowed.

  Bob Brown, private analyst in Edmond, Okla., said he is "at a loss why there
is so much upward pressure on hog prices. It is looking like what the sow
market has been doing for several months, that is, ridiculously high live
prices while the cutout is horrible. It's like someone is making a point of
driving hog prices higher every chance they get regardless of what the cutout
is doing," he said.

  For the rest of March, Brown is projecting hog prices to drop $2-$3 per
hundredweight from where they are now and the pork cutout doing the opposite.
He along with some others expects the market to work towards equilibrium.

  Joe Kropf, analyst with Kropf and Love Consulting in Overland Park, Kan.,
said while it is difficult to envision a scenario in which hog prices decline
and pork prices rise, it's not so hard to envision one "in which the pork
market more or less holds its own while hog prices adjust lower."

  Kropf said its unlikely that packers can stand too many more weeks like last
week in which margins were deeply negative. Therefore, to improve their
margins, packers either have to get hog prices down and the pork up, or hog
prices must come down enough to be in balance with a steady pork market. This
may require that packers reduce slaughter and pork production enough to boost
pork prices more than hog prices over the next three weeks, he said.

  Processing margins "are bad, but market share and filling orders are more
important for the moment," said a Midwest-based meat broker. Wholesale prices
for most of the pork cuts seem to be stable for now.

  Don Roose, president, U.S. Commodities, said some packers may be anticipating
pork prices to move higher in the weeks and months ahead and could be storing
away product at the current low price in hopes of selling it at higher prices
later on. In late 1998, when hog prices fell to Depression-era lows, some
packers held onto pork that was produced when prices were very low then sold it
later on after prices rebounded, he said.

  A few livestock dealers and market managers are more bullish on hog prices
and predict that supplies may tighten enough in the near-term to result in
steady or near-steady prices regardless of whether the pork market rebounds.
Should hog slaughters decline from year-ago rates, pork prices could move up
fairly rapidly, they said.