Al Prosch

Closing the year at or near current levels will happen if demand remains pretty constant, including exports, and the hog supply continues to come much as expected. The futures market seems to be satisfied at this point that this will happen. Cash at $59.00 to $60.00 carcass weight and the December futures at or near $63.00 are pretty well in line. It seems that cash may be leading futures.

The December contract is also tracking the seasonal average fairly well. The contract has recovered from a less than typical October price drop and now is trading sideways (Chart 2). It could move up to reach previous seasonal high, which in this case is the same as the high in Oct. But, it appears cash will have to lead the way. Continued export increases and good domestic demand over the holidays would support this happening. Exports remain key, however. According to Ron Plain, University of MO, exports used up an additional 3.2% of 2005 US hog production. Without this additional foreign demand, the price picture would be pretty unpleasant.

Looking farther into the future it appears that exports need to retain their growth or at least maintain the current levels to expect prices in 2006 to hold at current levels. Futures offer an opportunity to price well into next year at prices near or above $45.00 live weight. Using current futures values through December of 2006, producers with a breakeven around $40.00 per Cwt. would net over $13.00 on a 270 lb. market hog. The futures market appears to be expecting overall pork demand to hold. Also, it would appear that there are no expectations of significant expansion in the North American production herd. I would agree on the expansion issue.

I have less confidence in the export situation. Brian Roe, Associate Professor at Ohio State University, has a good discussion of the beef export situation that you may want to read, available at: http://aede.osu.edu/people/roe.30/outlook/2005/Nov%2005%20commentary.pdf (PDF).

When the export market with Japan is reopened, there will be supplies of variety meats and other products from the beef industry competing with current pork exports. How that affects the live hog price remains to be seen. While beef exports are not likely to quickly recover to pre-December 2003 levels, the availability of the beef export market will give foreign pork buyers leverage to hold bids down. Second, some exporters may be willing to take low or no profit to attempt to “buy” back markets. And, that could include suppliers outside the US who wish to retain their gains from the past two years. Last, we know that small changes in the relationship of supply to demand in the pork industry can have large live hog price consequences. There is a potential for markets to over react. Producers with price floors established will largely be able to ignore this. Producers without protection will need to weather such price corrections, which could exceed the levels supply and demand would suggest.

I will close this letter off with a direct quote from Dr. Roe’s comments, “To me, this is a strong signal to consider locking in down-side price protection of some form.”

Source: University of Nebraska's Pork Central - November 2005