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Understanding Chicago Pork Futures

27 June 2014
Mike Brumm
Mike Brumm

US - The sharp decline in anticipated value for pigs sold next year should make producers think about risk management possibilities to capture as much of this year’s positive pricing as possible, explains Mike Brumm for the Minnesota Pork Board.

While many of us involved in pork production have a general idea of current prices and we generally pay attention to the Chicago Futures prices, I thought I would put current prices in layman's terms so we really appreciate today’s economic incentives. It also helps us better understand the risk management decisions producers are facing as go into the new 'Hogs and Pigs' Report published on 27 June.

Lean hog futures on 26 June closed at $128.80 for Aug-14, $95.65 for Oct-14, 89.00 for Dec-14, 92.10 for Jun-15 and 79.25 for Oct-15. You fully don’t understand these prices until you put them on a per-pig basis.

USDA-inspected barrow and gilt carcass weights averaged 213.5lb on 26 June. For the sake of examining future income, I’ll use 210-lb carcass weights.

At this weight, the projected value by contract month per pig based on yesterday’s closing price becomes:

  • Aug-14: $270.48
  • Oct-14: $232.26
  • Dec-14: $200.87
  • Jun-15: $193.41
  • Oct-15: $166.43

Suddenly, you can see the impact of expected future income streams based on the Chicago futures. Yes, there is the issue of basis - difference in Chicago price versus local price at time of delivery - but that impacts all months to some extent.

Currently futures traders expect enough of an increase in supply between August and October that the pigs are predicted to decline in value $38.22 per pig. Depending on what happens with this summer’s corn crop, the decline in value may be accompanied by a slight decrease in input costs, although much of the input costs of pigs sold in late September and early October is already locked in.

From October to October, the value declines by $65.83 per head. For those of us actively involved in the industry, there have been many years when profits were considered very good if they amounted to $10 per pig. The sharp decline in anticipated value for pigs sold next year has a lot of producers thinking about risk management possibilities to capture as much of this year’s pricing as possible.

ThePigSite News Desk



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