Hog futures have steadily declined in the past four weeks. Since 16 July, the CME August hog futures contract has lost some $17 or 35 per cent. The decline has been particularly hard on nearby hogs but deferred contracts also have been pressured lower as market participants reduce their long positions in light of limited industry production cutbacks and speculation that the upcoming flu season could further limit US pork exports and create significant imbalances in the domestic pork market. The latter point is especially important.

Exports have been the primary growth area for US pork producers in recent years. Thanks to that growth, US producers were able to have banner profits in 2004, 2005 and 2006. Some of those profits were plowed back into expanding production, banking on ever growing export sales, especially to developing countries and their nascent middle class. By 2008, US pork exports hit 4.7 billion pounds, accounting for 20 per cent of overall US pork production. It was a truly remarkable achievement.

As recently as 1999, the last time the pork industry faced a collapse in hog prices, pork exports accounted for only 9 per cent of total production. Back then, hog supplies simply overwhelmed production capacity. Today, production capacity is more than adequate but what is lacking is the certainty that the markets which US producers worked so hard to develop with remain open. So far, US pork exports have fared better than expected. The decline in US pork exports to China was not a surprise, after all they have a large production base and therefore the ability to expand production quickly should the market demand it. Exports to Japan and Mexico in 2009 also have been within expectations, especially considering the negative effect of the H1N1 flu outbreak. But what futures markets trade is not the past.

There are significant concerns that a global outbreak of the H1N1 flu will bring back the erroneous linkages to pork. Countries could use the opportunity to close access to their markets in an effort to support domestic producers. As we have seen in other instances, including in this country, there is always the temptation to use such situations to further local economic goals. Currently futures are trading this uncertain future as well as the lack of any perceptible effort to reduce pork production capacity. There is talk of more sows going to slaughter but markets tell a different story as sow prices in the past four weeks have increased by almost 30 per cent at a time when pork supplies are abundant. It is difficult to believe in liquidation when sow slaughter plants have to raise their bids secure product.