Pork Central Hog Market Thoughts for September 2005

By Al Prosch, Nebraska University Pork Central Coordinator - The December futures contract is following the typical December seasonal pattern (chart below). If this continues, a typical October price change would be negative and drop to near the August (in this case late June) low.
calendar icon 3 October 2005
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Al Prosch
Al Prosch

Then a typical recovery in late October and November is usually about one-half of the drop from the September high. In more recent years the December contract has recovered nearly to the September high. This would suggest December futures will be better than anticipated earlier this year.

Supporting that outcome are weights and numbers of market hogs. Both are still below last year. Weights may have been affected by heat and the need to move the market hogs on schedule. As more hogs move on schedule fewer can be fed longer to make up for reduced gain, even when feed is cheap. However, we have had some cool days, and the potential for two weeks of great feeding days may bring weights up quickly. This usually contributes to a normal October price decline and this year may create a rapid change.

Cash and futures prices have continued to provide excellent pricing opportunities. Based on the current lean hog futures contracts through October of 2006, a -$2.00 basis, and the current corn and soybean meal futures for the same time, producers have an opportunity for profits over $17.00 per hog. Consider current feed prices, then remember soybean meal prices 18 months ago (see chart below). It is obvious this is a good time to look at ways to forward price feed. With a large corn harvest looming, there should be ample time to take advantage of this. Basis in the Midwest is large and actual cash bids are often discounted more than current futures. For those who can buy ahead, or buy and store, this is an opportunity.

The soybean harvest is a little less certain. Look at fundamental crop reports, and you may want to take some action. An aggressive plan for pricing feed inputs may be the best “marketing” strategy for the next year. Along with favorable feed prices, hog prices have rallied and offer an average producer, when coupled with current corn and soybean meal futures prices, an opportunity to secure a $17.16 per hog through September of 2006. This level of profit will likely encourage any expansion that is already planned in the production sector of the pork industry. Expansion (or for that matter contraction) in the production sector does not react to live hog price movement as quickly as it did in the past.

However, this period of profits is longer than typical. John Lawrence, ISU economist, shows 11 profitable months in 2004.1 For most producers 2005 has added 9 additional months to this total. If producers control feed costs and market well, the opportunity is available to add another 11 months to this total.

In February 2005 John Lawrence2 calculated a breakeven cost of $39.46 per cwt. live weight for Iowa producers. Since that time corn and soybean prices in Nebraska have dropped. Corn dropped by -12.5% and soybeans by .4%. Feed cost should 7% less than those used in the February estimates. A 31 month string of profitable production would be unique, possibly enough to encourage some added expansion.

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

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