CME: Lean Hog Futures Post Modest Increases

US - After a sharp pullback, lean hog futures posted some modest increases on Thursday afternoon, write Steve Meyer and Len Steiner.
calendar icon 1 February 2010
clock icon 4 minute read

Lean hog cash prices, IA/MN USDA wt. avg, was quoted on Thursday afternoon at $63.96/cwt, $3.1/cwt lower than the previous week but still some $4.5/cwt or 7.5 per cent higher than the previous year. Wholesale pork values continue to lead the current market, with the cutout consistently above the price of hogs since last summer If anything, the spread has become even larger in recent days, which should be good news for packers and should allow them to be more aggressive in their bids going forward.

Wholesale pork prices finally took a breather this week but the decline from week ago levels was no surprise for anyone watching this market. There is only so long you can defy gravity until you run out of power and come back to earth. As we have pointed out in this letter for the past few weeks, much of the sharp appreciation in pork values was due to weather induced supply disruptions. The supply chain appears to have recovered for the moment and most packers are operating at normal schedules.

However, continued cold weather across much of the US Midwest will remain an issue, mostly affecting transportation. Hog slaughter so far this week is actually down about 1 per cent compared to the same period a week ago and down 90,000 head or 5 per cent compared to the first four days of the comparable week last year. Hog slaughter continues to run significantly behind last year’s levels and it appears that the Hogs and Pigs data reported on 30 December missed the actual supply of hogs on the ground by a significant margin.

Going forward, the cash hog market should be well supported by strong sales in the domestic market as well as steady growth in export demand. One factor that could constrain exports is the sudden strength in the value of the US dollar, especially vs. the Euro. The value of the EU currency has dropped sharply in recent weeks as markets remain jittery about the financial situation of some EU members (especially Greece) and the potential impact this could have on the financial situation of the European Union as a whole.

The US dollar has appreciated by 8 per cent vs. the Euro since early December and the EU is the second largest pork supplier in the world behind the US. The US still enjoys a significant competitive advantage in pork production and its cost structure but the strong Euro could have an impact at the margin, especially in shipments to Eastern European markets. Overall, however, the outlook for pork prices going into the spring and summer is good, especially since pork producers will not have to contend with all the “flu“ hysteria.

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