US hog market review: large US slaughter numbers inhibit future price rallies

The lean hog futures market appears to be overdone on the downside at present, with the longer-term monthly chart also suggesting limited downside price potential at present levels.
calendar icon 7 February 2020
clock icon 5 minute read

The hog market has been beaten down recently by the coronavirus outbreak in China prompting fears regarding Chinese demand for pork, as well as the outbreak causing global economic growth be nicked in the first quarter. However, by mid-week this week the coronavirus scare seems to have passed, as seen by rallying global stock markets. Importantly, the move by China’s central bank this week to inject short-term liquidity into the Chinese financial system to support domestic businesses hurt by the coronavirus outbreak, sent a signal to the global marketplace that China intends to blunt any negative effects from the illness. And, as one long-time market analyst said, “The Chinese people still have to eat.”

As is often the case, an unexpected shock to the marketplace is initially deemed by traders as being close to a worst-case scenario and market prices react accordingly. Then, such turns out not to be the case, as is apparently so with the coronavirus outbreak. As seen in my analytical charts below, the lean hog futures market appears to be overdone on the downside at present, with the longer-term monthly chart also suggesting limited downside price potential at present levels. While the charts are suggesting not much further price pressure in lean hog futures, continued large US slaughter numbers will keep a lid on any futures price rallies.

The next week’s likely high-low price trading ranges

April lean hog futures - $60.00 to $68.45, but with an upside bias.

March soybean meal futures - $285.00 to $297.00 but with an upside bias.

March soybean futures - $8.68 3/4 to $9.00 but with an upside bias.

March corn futures - $3.75 1/4 to $3.94 with sideways trading bias.

Latest US Department of Agriculture (USDA) reports

Highlights from the USDA’s Economic Research Service January report on pork and poultry.

US pork industry expanding as producers become more efficient

USDA issued its December Quarterly Hogs and Pigs 23 December, 2019. On 1 December, the US hog industry was bigger and more productive that it was a year earlier. For the fifth consecutive year, the 1 December inventory of marketing hogs was the highest since the series began in 1963, at almost 71 million head, 3.1 percent higher than a year ago. The 1 December breeding inventory increased more than 2 percent over a year earlier - this is the 15th consecutive year-over-year increase in the quarterly breeding herd since the last time the breeding inventory showed a decline, in March 2016.

The US breeding herd has not shown a significant, sustained contraction since the period between June 2008 and December 2010. The current breeding inventory expansion has largely been driven by the construction of three large processing facilities, and the refurbishment of a mid-sized plant, in three midwestern states. These facilities together contributed to the increase of weekly US slaughter capacity from about 2.5 million head in 2015 to more than 2.8 million head in the fall of 2019. In addition, optimism over potential expansion in exports may be fuelling recent inventory growth.

The December report showed the US hog industry achieved a third consecutive quarterly litter rate of 11 or more pigs per litter. National litter rates of 11 pigs per litter or more had been a longtime goal of the US hog industry, although such litter rates have been commonplace in Canada (particularly in Manitoba) and in Europe for quite some time. Factors contributing to the 11+ litter rates in the United States last year are varied; they include innovations in pre- and post-natal sow and weanling management and care, sow nutrition, weather adaptations, and management of disease occurrences. Chief among litter-rate enhancement factors, however, are probably improvements in genetics. Superior litter rates in 2019 likely indicate that distribution and optimal utilisation of high-quality genetics is gaining traction in the US pork industry.

The December report forecast total US pork production in 2020 of 28.6 billion pounds, an increase of almost 4 percent compared with production in 2019. First-quarter pork production is forecast at about 7.2 billion pounds, an increase of 5 percent over a year earlier, with first-quarter prices of live equivalent 51-52 percent lean hogs expected to average $50 per hundredweight (cwt) during the quarter.

Second-quarter production is expected to be about 6.9 billion pounds, about 4 percent higher than a year earlier, with average second-quarter hog prices forecast at $56 per cwt. Third-quarter pork production is expected to be about 7 billion pounds, about 4 percent higher than a year earlier, with third-quarter hog prices forecast to average $59 per cwt. Fourth-quarter 2020 pork production is forecast at about 7.7 billion pounds, about 3 percent above production this year, with hog prices expected to average $53 per cwt.

Separately, USDA also reported in January that China’s emergence as a pork importer reflects growing resource scarcity as the nature of hog production there undergoes dramatic change. As China’s pork prices rise above global prices, imported pork and other types of animal protein are becoming more attractive to consumers, processors, and food-service buyers in China.

Rising production costs prevent Chinese pork prices from declining to become competitive with international prices. During the 20th century, China became the world’s leading pork producer by dispersing hogs in the backyards of rural households, a production model that utilised China’s abundant rural labour supply.

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