Are High Hog Futures Here to Stay?
ARE LOWER CORN PRICES AND HIGHER HOG PRICES IN THE NEAR FUTURE?
By Moe Agostino, HBA, DMS, FCSI,
Managing Commodity Strategist,
Farms.com Risk Management
In 2011, by early April, CME Lean Hog futures had already achieved an intraday record high for the June futures contract at US $104.10/cwt, only to retest the high at $104.35 by May 2011. The contract eventually moved lower by $12.50/cwt to go off the board at $91.85/cwt. The only futures contract that achieved an even greater high was the 2011 August futures contract, which expired at a new all-time record of US $107.45/cwt. In the first quarter of 2012, CME Lean Hog futures began trading at very lofty levels, but have since slumped as the US pork carcass cutout value -- a measure of domestic demand and movement of pork supply -- has slipped, now down to US $79.35/cwt compared to last year at US $94.28/cwt.
IS IT SUPPLY OR DEMAND? IT’S BOTH.
A combination of higher feed prices, record retail prices, higher retail gasoline prices, more pork in cold storage, negative packer margins, and about 2% - 5% more pork supply -- due to continued productivity efficiencies and higher hog weights because of milder winter -- resulted in a recipe for lower hog prices. In fact, at the start of 2012, managed money were adding to their futures contracts and were bullish about the future.
They have since been sellers and are now net short hog future contracts while corn prices have been relatively flat. This has caused the hog-corn ratio to fall to 10.1 for March. With the exception of the disastrous months between January 2008 and January 2009, when the average ratio was below 10, this is the lowest reading since 1998. The old rule of thumb is that a ratio above 18 or 20 means hog expansion and vice versa. A ratio of 10 or lower simply means herd liquidation or no expansion and the possibility of lower corn prices and higher hog prices in the future.
PORK CARCASS CUTOUT
Seasonally, the hog market can muddle along until Easter, but shortly thereafter the buying for the summer grilling season kicks in and it could be enough to get futures back to the highs of 2012 around US $100/cwt -- but will it be enough? Historically, we can see an increase of as much as US $10 – $15/cwt in this seasonal period of time from March 24 to June 22 of each year. As always, each year is different, with last year being early and this year obviously being late.
LEAN HOG INDEX HISTORICAL PATTERNS
ASIAN DEMAND KEY!
The strong pork export demand driven by Asia produced a record 2011, up 25% vs. 2010, has so far continued in 2012. However, some experts are worried that since we are at such lofty levels, this too will start to disappoint in the coming months of 2012. However, this is still only 25% of the pie, while domestic demand continues to represent a very large 75% and is just as, and even more important, for prices short-term.
LOWER FEED PRICES POSSIBLE
The 2012 March USDA Prospective Plantings report projected that US farmers intend to plant 95.9 million acres of corn this year, the highest level in 75 years. There are still many hurdles to jump over to get such a large crop in the bin, but if trend line yields are realized, grain costs should decline this fall, and, of course, hog prices will go down in sympathy.
If domestic and export demand do not remain strong, with supplies about 2% - 3% more than last year, and if feed prices eventually do fall, high hog prices will be tough to come by. But this game is not over yet! A patient hog producer should still be able to lock in margins and profits in the next 2-4 months for the fall/winter of 2012 and 2013, before expansion in the industry and lower feed prices take the hog industry by surprise. Look for a second summer rally in August 2012.
Moe Agostino is a Managing Commodity Strategist for Farms.com Risk Management. For more information on our recommendations and how to manage price risk in your crop and/or livestock operation, contact Moe at Moe.Agostino@Farms.com or go to www.RiskManagement.Farms.com