Market Preview: Hog Prices Just an Anomaly?

by 5m Editor
3 May 2008, at 4:59am

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.

To use an appropriate porcine question: Will demand save our bacon?

When we look at the last two weeks, the answer could certainly be a resounding “Yes!” Why else would packers be aggressively chasing hogs when slaughter rates are so high? And why else would prices be near year-ago levels on year-to-date (YTD) slaughter that now stands 11.5% higher than one year ago?

Supply is way up. Prices are hardly below last year. Life is good – or at least better.

But can this hold? Can hog demand maintain the 8% increase we saw from January through March, as was pointed out by Professor Glenn Grimes at the University of Missouri? Will packer margins remain large enough, without pushing hog prices downward, to maintain the incentive to process 420,000-plus hogs/day? Will the normal seasonal break in beef prices put pork behind the eight ball in the retail meat counter this summer? Can broiler producers reduce supplies enough to drive near-record prices to new highs and, thus, support the entire meat complex? Is the recent rise in the U.S. dollar (the June U.S. Dollar Index reached its highest level since early March last week) a turning point?

So many questions; here’s my inadequate answer: “We’ll see.”

All of these variables have contributed to a remarkable run-up in cash hog prices. I want to believe that the worst is behind us and the predictions of $80-90 hogs this year, and upward for next year, are correct. I really do. And if you believe that prices efficiently and accurately reflect all of the information in the market, then you should probably buy into those forecasts. Those $70-plus bids this week may be here to stay, but I’m not a believer yet.

The reasons are simple: Large meat supplies. Huge pork supplies. More beef on the way – at least seasonally. Higher fuel prices this summer. And even if the hog prices remain higher, we still face substantial risk for feed prices since we have thus far put seed corn in the ground at a pace roughly commensurate with that once achieved by a Model A John Deere and a two-row planter! Corn at $7/bushel is still well within the realm of possibility.

What are you saying to your banker when he poses these questions:
  • “I understand you are losing money, but what are you doing to minimize your losses?
  • “How long will these losses last?”
  • “What is the extent of your cash needs until cash flows turn positive?”
Bankers do not want to shut good producers down. They did not go into banking in order to own hog farms or, especially, take care of hogs. They make little money by holding cash. They want people in business so those people will borrow money and pay interest.

What they do not want is a customer who is borrowing money, doesn’t have a plan or an idea of how to limit that borrowing and, therefore, doesn’t know how much will be needed before the banker can stop advancing funds. They probably feel the same way you would feel if your college son or daughter came to you with a large credit card bill and no way to pay it. You want to help, but without a plan, you would (or at least should!) say “No” because it is the best thing for everyone.

I have admonished producers for some time to have a plan in place to limit the upside risk in feed prices. Though the level at which that protection can be placed is much higher than it once was. Still, it’s a prudent idea.

“But those call premiums are just a rip-off and I’m cash poor as it is,” you say. True. But are you going to drop the insurance on all of your hog buildings this year because cash is tight? That’s a similar proposition and the chances of higher-priced corn are, at the moment, probably better than the chances of a fire or a tornado.

And while the level of coverage available on corn is not as good as it once was, the potential “ceiling” level for soybean meal has fallen pretty sharply. So the news is not all bad.

As for hogs, the average of the eight futures contracts to cover the next 12 months is, as of Friday morning, $75.77/cwt., carcass or $56.82/cwt., live. The average for the rest of this calendar year is $73.95 carcass, $55.47 live. History tells us that the summer futures are likely near their peak as they normally fall from May 10 onward. In fact, Tuesday’s break in Lean Hog futures could have marked the seasonal peak.

How would your financial situation be if you put a lid on feed costs at current levels and could lock in hog prices at $72-$73/cwt., carcass? That is available. Would the answers for your banker be good enough to keep him/her on board and keep you in the business until the good times return?



5m Editor