Hog Futures are In Hog Heaven!
It's more important than ever to manage your risk.
By Moe Agostino
The last time hog futures achieved record highs was when the June 2009 futures contract reached US$100.30/cwt in the summer of 2008, when China was buying a record amount of U.S. pork for the Summer Olympics. Unfortunately, when this Chinese demand evaporated, coupled with the global recession in the fall and winter of 2008 and the drop in feed prices, hog futures fell hard.
In 2011, we see a repeat of 2008. Hog supplies continue to shrink. The U.S. supply is down 7 percent since 2007 in response to higher feed prices and strong domestic and export demand. Still, export demand is about 3 percent lower than 2008 and feed prices are trading at record highs of US$7.70/bushel. The triple threat of lower supplies, higher feed costs and better domestic and export demand as domestic and global economies improve have sent hog futures soaring to new all-time record highs of US$104.45/cwt for the August 2011 futures contract (see Chart 1).
Pigs can fly!
The question now is can we climb into unchartered territory, or how high can we go in 2011? From the latest USDA Quarterly Hogs and Pigs Report, it looks like expansion remains at bay with a 0.5 percent increase. However, supply is still higher than expected due to record productivity gains and carcass weights that are more than 5 lbs. heavier than any other year in recent memory. Some people believe this is due to higher quality corn in 2010. Last year was a record year for hog weights, with an average live weight of 270.5 lbs. (122.7 kg) (see Chart 2).
If it were not for the higher hog weights, hog supplies would be that much lower and hog prices that much higher. Seasonally, hog weights fall as the weather warms up. Despite record hog prices at the retail level, domestic demand remains strong and export demand for the month of January 2011 was up 17.2 percent compared to the same period a year ago. U.S. pork exports are expected to increase by 10 percent in 2011. This would represent a record 21 pe rcent of domestic production. This means the available supply in the U.S. will drop by as much as 3 percent in 2011.
In fact, the U.S. pork cutout value is trading at US$28/cwt - more than any previous year for this time of the year, and traded at US$94.28/cwt on April 7, 2011, just shy of the record high on August 24, 2010 at US$96.74/cwt. (see Chart 3 below).
Foot and Mouth Disease in South Korea seems to be spreading across Asia and these countries (including China) could see more imports of U.S. pork in the coming months. The United Nations Food and Agriculture Organization (FAO) is urging authorities a century." As of April 4, 2011, over 33 percent of all in eastern Asia, South Korea and North Korea to proactively vaccinate animals in an effort to stop the spread of Foot and Mouth disease.
In a direct quote, Dr. Juan Lubroth, FAO chief veterinary officer, said "The current FMD dynamics in eastern Asia, as well as the magnitude of the outbreak in South and North Korea, are unlike anything that we've seen for at least a century." As of April 4, 2011, over 33 percent of all South Korean pigs have been culled.
On top of this, we have U.S. cattle herds that have dropped to the lowest level in 50 years and it typically takes more than two years to increase the size of the overall cattle herd. This means prices will likely stay very high for some time.
A further increase in demand by Asian countries purchasing U.S. pork could be the catalyst that is needed to take hogs to higher “hog heaven” prices, aided by record high cattle prices. Eventually the “cure for high prices is high prices,” – high prices usually lead to expansion, which corrects high prices. Manage your risk, manage your volatility! What is your marketing plan?
Editor's Note:Moe Agostino is a managing commodity strategist for Farms.com Risk Management. For more information on managing risk in your crop and/or livestock operation, contact Moe at: email@example.com. To learn more about the markets, go to: www.riskmanagement.farms.com.