CME: Market Participants Caught by Surprise
US - According to CME's Daily Livestock Report for 2 June 2009, the hog futures market seemed to collapse under the weight of unmet expectations as market participants apparently gave up on any hope of a summer rally and sent futures down the daily permissible limit.All pork summer
contracts, both lean hogs and bellies, closed limit down (300 points)
on Tuesday afternoon. June through October lean hog carcass futures
established life of contract lows. 2009 pork belly futures also
are now at life of contract lows. The sharp retraction seemed to
catch some market participants by surprise, especially as there
was not a major news outbreak prompting the widespread selling.
Rather, it seems that market participants were spooked by the
surge in grain futures and the potential short term impact that
this will have on hog producers. At this time, it seems to us that
producers are running behind in their marketings, as evidenced by
lean hog carcass weights that are some 3 pounds or 1.5 per cent above a
year ago.
At an average of 204 pounds per dressed carcass,
weights are at a new all time record level for this time of year.
With producers running behind and feed costs escalating, market
participants likely concluded that there will be a rush to sell animals
in a market that clearly is having demand problems. Slaughter
levels may still be below year ago levels but that does not mean
much when higher carcass weights have offset much of that decline
in slaughter and production levels are significantly above what
they were in 2006 and 2007. For the week ending 30 May hog
slaughter was down 1.2 per cent from a year ago but pork production was
up 0.3 per cent.
It is also suspected that exports to Mexico have slowed down
considerably and this has negatively impacted the market. In the
first quarter, Mexico was one of the main growth markets for US
pork and helped offset some of the expected declines in shipments
to Russia and China. Now it appears that is no longer the case.
Ham values have been hit especially hard, Mexico is a significant
market for US hams, and they are currently some 40 per cent lower than
a year ago. Finally, there is all the talk of a sow herd retirement
program and the impact that such a liquidation could have on pork
supplies short term. In all, another terrible day for pork producers,
especially when considering all the bullish talk about corn
prices for next year.