Moe Agostino

Most commodities have plummeted in 2016, responding to a weaker macro-economic picture, but the one exception, oddly, seems to be hog futures, which have rung in a healthy 6% rise thus far making it the best performing commodity in the first quarter of 2016. There are 4 key forces or trends that remain a tailwind for hog futures in 2016, and are brewing up a perfect storm:

1. Cheaper gasoline prices, which are leading to increased spending at restaurants.
2. Better than expected domestic and export demand.
3. Modest supply growth of 1% in 2016 vs. 2015.
4. Reduced production due to PEDV, PRRS and AI Extender Issues

U.S. CONSUMERS SAVING AS MUCH AS $200 BILLION ON CHEAPER GASOLINE PRICES

The fall in crude oil prices to a 13-year low in 2016, from a high of $108 to $30/barrel in the last 2 years, has given U.S. consumers a big tax break and saved them as much as $200 billion in the past 2 years. (Please see chart below)

Since the 2008 financial crisis, the U.S. savings rate has gone from a low of 1.5% to over 5.5%. However, credit card data shows that 1 out of every 5 dollars in extra savings, or 20%, is spent on eating out more at full service restaurants and another 8% went to buying fast food. $20 more each month in spending at restaurants means an extra $240 per person on an annual basis. If we multiply this by the approximate 170 million people in the U.S. with credit cards, it equals almost $41 billion in spending a year at eating outlets. That’s a significant shift in consumer spending!

AVERAGE AMERICAN CONSUMES 90 KGS OF MEAT

What’s on the menu? According to OECD data, the average American adult consumes 90 kgs of meat, which is almost 3 times the global average at 34 kgs. The U.S. economy grew by a slight 0.7% during the 4th quarter of 2015 and by 2.4% for all of 2015. A growing economy usually translates into growing meat demand.

BETTER PORK DEMAND KEY TO HIGHER PRICES

The good news for domestic meat demand is that the U.S. Commerce Department says consumer spending increased by 0.5% in January, the most for any month since May of 2015. Last year was the 3rd consecutive year with stronger domestic demand for pork. Measured at the retail level, pork demand was up by 4.2%. According to AHDB Pork, global pork prices are hitting an 8 year low!

This is leading to more U.S. domestic disappearance and leaving less for the export markets, despite a stronger U.S. $ index that remains a headwind in 2016. In fact, pork exports increased by 4% in January from a year ago to 167,010 mt, but fell in value by 11% to $404.7 million. Despite slowing economic growth and slackening demand for commodities, the decline in the Chinese swine breeding herd of over 11 million sows has led to China importing a record large volume of pork and pork variety meat in 2015. US exports to China were up significantly from last year’s low volumes, reflecting recent reinstatement of several U.S. plants and continued strong demand for imported pork in China. The volume of this export in January was up 84% from a year ago to 32,609 mt and value increased by 50% to $64.2 million. Import data for China and Hong Kong shows that January was another record-breaking month, with combined volume from all suppliers reaching 224,077 mt, up 29% from last year.

2016 HOG SUPPLY GROWTH UP A MODEST 1% VS. 2015

Lean hog futures have been in an impressive uptrend since the middle of last November despite record large production last year and projections for record production again in 2016. However, an anticipated reduction in hog numbers, resulting from production problems caused by inferior boar semen extender and increased cases of PEDV and PRRS outbreaks could result in a counter-seasonal window of higher live hog prices during the pre-Easter period which usually is a weak period. This potential production problemcould result in reduced slaughter numbers on reduced litter sizes which will start coming to market very shortly and could push prices higher. The estimate could be 3-5% less hogs coming to market for a 3-4 month period. Some have estimated a loss of 1 million hogs or more due to AI extender.

Lower priced pork has attracted renewed demand in the U.S. and abroad despite a stronger U.S. $ Index. Pork remains much cheaper than beef which remains historically high. With U.S. hog slaughter up marginally (+1%) vs. last year and better demand, futures have performed better than most expected thus far. A break out above old highs set in July 2016 for the 2016 June hog futures contract now leaves upside targets open at $86.37 and then a rare 4th price count at $102.975/cwt!.

Higher 2016 hog futures will lead to higher 2017 futures as well, which will only add to hog producers margins as feed remains cheaper than it has been in quite some time. From gold and silver to bonds and the Japanese Yen, safe havens have been in demand. Now, it includes hogs, who would have thought?

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- Moe Agostino
Moe Agostino is a Chief Commodity Strategist with Farms.com Risk Management Inc. For more information on managing risk in your grain and/or livestock operation, contact Moe at
moe.agostino@farms.com or go to: www.riskmanagement.farms.com

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