Market Preview: Canadian Pig Surge Continues

US - Weekly US Market Preview for the weeke ending 21st December 2007, provided by Steve R. Meyer, PhD, Paragon Economics, Inc.
calendar icon 22 December 2007
clock icon 5 minute read

Pig imports from Canada are setting records about every week. A new record was set last week for feeder pig imports at 152,371 head. A new record for market hog imports of 81,781 head was set the week of Dec. 1. Figure 1 shows these weekly data back to January 2000. These recent surges have pushed feeder pig imports above the six million head mark and market hog imports above 2.6 million head. Those numbers are 11% and 24%, respectively, above the year-to-date (YTD) levels for Dec. 15, 2006.

Figure 1

These shipments are symptoms of the economic situation in Canada that we have discussed here on several occasions. The increases suggest that things aren't getting much better as the Canadian dollar has weakened slightly this month. Of course, any change in the rate will take some time to filter through, and the slight move in the value of the Canadian dollar has been more than offset by the continued strength of grain markets.

I've heard very little talk of any trade action over this surge in imports. Apparently, U.S. producers are pretty loath to pile on the situation that Canadian producers are facing. But the few I have spoken to change their tone quickly when they consider the possibility of the Canadian government offering substantial payments to ease the burden. It is a touchy situation that we all need to be aware of.

Where's the Ceiling?

I have spent the past couple of weeks trying to figure out what might stop corn and soybean prices from rising. Lower wheat prices have not done the trick -- even though it is difficult to argue that "lower" wheat prices are in any semblance "low" wheat prices at present. Corn and soybean markets have not responded at all to drops in wheat futures over the past week.

In fact, corn and soybean futures have reached contract-life highs across the board this (Friday) morning, while soybean meal futures are all higher with contracts from May 2008 and beyond -- all at contract-life highs.

It appears that the only thing that is going to stop these prices from continuing upward is good news -- first from the Southern Hemisphere and then from here in the United States -- as planting begins.

There is a risk premium in the futures market that says, "Just in case, we'll pay this much for you to plant 'X' number of acres this spring." That will not abate until something says the just-in-case factor is not necessary. I haven't seen anything that suggests that yet. Let's hope they have a crop in South America and that planting goes well here -- or we may not have seen anything yet.

The impact of these higher prices can be seen in Figure 2, which shows that my feed costs index is nearing the record level set in July 1996. The index has increased by almost $90/ton since last September, adding roughly $34/head to the cost of raising a pig. That has taken breakeven costs from the upper $30s, live weight, to the low $50s. Carcass-weight breakevens are now very near $70/cwt.

Figure 2

What looked like a breakeven year in 2008 is getting shakier by the day. As of this morning, only the May through August futures would offer a profit at these costs levels -- and those futures prices are still higher than strict supply-demand fundamentals would suggest.

Watch for 'Bears' in the Pig Crop Report

Next week's USDA Hogs & Pigs Report will be very important to this market. Look for some major revisions, especially to the market hog numbers published in the September report. It is possible that USDA will revise the sow herd upward for the past year or so -- given the slaughter numbers we've seen this fall.

A concern is how index funds and other non-ag investors in these futures contracts might interpret major upward revisions. Many of them do not have much experience with the pork industry. We think the potential for a bearish report and a bearish reaction is pretty high.

So what do you do? That's a quandary. December is, historically, a lousy time to sell lean hogs futures contracts. There are better times of the year to sell every futures contract -- again speaking from history. So, if you do not have hogs covered by now, you must balance your ability to stand a bearish report against the possibility of selling hogs at seasonally low prices.

One answer would be to use options -- either put options or sell lean hogs futures and buy out-of-the-money call options. You would be protected against a price break but be able to ride any price rallies beyond your strike price upward. Options, though, tend to be a bit expensive, especially for months far into the future, since the time to expiration is one important component of an option's value.

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