Pork Central Hog Market Thoughts for February 15th 2006

By Al Prosch, Nebraska University Pork Central Coordinator - Pork prices are staging a mild recovery. Futures prices and cash hog prices have recovered slightly from the recent low. The chart below shows the Western Corn belt cash lean hog price as reported by the Livestock Marketing Information Center.
calendar icon 27 February 2006
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Al Prosch
Al Prosch

Note that live hog prices declined in the last half of 2005. The decline is pretty well in line with continued news of plentiful supply. Futures contract prices followed cash prices and declined into 2006. The recovery in both cash and futures value that started the 1st of February lost some ground on the 15th. This will need to be watched. As it is, the futures values at on Feb 16th (about 10:30 AM) would give most producers, those with a breakeven of $40.00 cwt. or less, an opportunity to lock in over $8.00 per market hog, based on a 270# selling weight.

The chart below gives some idea of how often the futures market has given various price opportunities over the past 10 years. Over the period of 1996 through 2005 lean hog carcass prices were over $70.00 per cwt. (green area) 26% of the time, between $55.00 and $70.00 (yellow area) 38% of the time and below $55.00 (red area) 35% of the time. The price range is from $32.50 to $85.00 per cwt. lean hog carcass. That is a pretty big spread.

One conclusion might be that the market offers above breakeven, using $40.00 per cwt live weight, 64% of the time, so why worry. The real question is “how much over breakeven must I have to sell 36% of my product below breakeven?”

The second item worth noting is that the two periods of exceptional markets, above $70.00 came with extremely unique circumstances. The 1996-97 market came at a time when all commodities, especially corn and soybeans, were rising rapidly. This market high did not translate to into high profit for many producers. The second high (2004-2005) came at a time of exceptional demand. In 2004 both domestic and export demand rose and in 2005, while domestic demand dropped some, export demand again grew at a phenomenal pace. However part of export demand was driven by problems in the beef industry. While pork will retain most if not all of this export increase, it is not likely to have large additional increases in exports to help absorb increasing supplies. If we consider these two instances as special circumstance markets then the remaining opportunities to hedge over $70.00 amount to just 6% of the time.

The same is true of market lows. The market low in 1998 was driven by a question of hog supplies and packer capacity. The low in 2002 appears to be a more typical market move, much like the summer highs in 2000 and 2001. The hog futures market typically moves up into late spring or early summer. However in 2002 the last time we moved off a series of highs, the following annual highs (2002) were set very early in the marketing year.

Markets are unpredictable because of the complexity of factors that influence final price. However, trend fundamentals should still be a large part of the risk management decision. Today’s market may encounter an unusual event that will change a market that appears to be starting a longer term down trend into one that moves back up. Added disruption in exports for other meat proteins would be such an event. If beef products don’t recover in the export market, or get added bans, and if poultry products lose market and export share because of avian flu problems, pork may be the only alternative. That would certainly change the supply and demand picture. But, short of such dramatic events, it appears to be a good time to manage down side price potential. Consider the time between 1997 and 2004 and think about what would have been a good strategy during that period.

Source: University of Nebraska's Pork Central - February 2006

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