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CME: Record High Hog Prices in the Fall Expected

by 5m Editor
18 August 2010, at 12:13am

US - Lean hog futures were higher on Tuesday as the market responded positively to USDA reports showing packers paying higher prices for hogs this week, write Steve Meyer and Len Steiner.

Hog futures have been steadily gaining ground in the last few sessions following the sharp pullback earlier in the month. The nearby October lean hog contract was trading as high as $80/cwt. on 2 August, a rather lofty price point for what is normally the low price time of the year. But the rally ran out of steam as market participants became increasingly nervous about testing such high price points for Q4 hogs and October futures broke by more than 600 points in the following five sessions. On Tuesday, the October lean hog futures contract close at $75.525 /cwt, 67 points higher than the previous close. And while October prices may be trading at a discount to current cash prices, that is not all that unusual. Higher pork supplies in Q4 normally pressure prices while demand for summer items starts to wane. We ask for your indulgence with the second chart below.

It outlines a band of the highest and lowest annual prices since 1999 (the green area) as well as the cash prices for lean hogs in 2009. We also included the five year average for the period 2004-09 to provide an indication of the general tendency in prices during the course of the year. As you can see, for much of this year, lean hog prices have surpassed the track record for lean hogs in the last 10 years and, based on the latest futures closing prices (red dots), hog prices are expected to remain above the 10 year price benchmarks through the end of the year.

And these record high hog prices in the fall are expected despite reports that Mexico will impose a 5 per cent ban on all US pork. There was plenty of consternation earlier yesterday when news broke of the proposed tariff and the potential impact on pork demand. In 2009, the US shipped about $541 million worth of pork to Mexico and as the top chart shows, about 5 per cent of all US pork produced in a given month goes to Mexico. But the magnitude of the tariff is such that it will probably have only a marginal effect on US pork shipments to that market.

What is more important for US pork exports to Mexico is the general outlook for the Mexican economy and especially the ongoing drug wars and social instability which is already having a negative effect on the tourism and related industries. For now, hog prices are flying high but as we saw earlier in the month, the market remains very nervous about the sustainability of such price levels and it is vulnerable to the first sign of cash weakness.