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CME: Lean Hog Prices Remain at High Levels

by 5m Editor
20 September 2010, at 12:44am

US - Lean hog futures were lower on Thursday but prices bounced back somewhat higher in overnight trading, write Steve Meyer and Len Steiner.

Despite the recent weakness in the lean hog complex, prices remain at some of the highest levels for this time period, a combination of tight supplies and strong demand in domestic and export markets. We touched on the current drivers in the pork market in our 9/15 issue of the DLR. One factor that will continue to be very important for the pork market going forward are exports, which in 2010 are forecast to account for almost 20 per cent of overall US pork production.

Pork exports will be impacted by a number of factors over which pork producers have little influence. The most important in this regard are exchange rates. Currency markets are an issue that we all talk about in the abstract but the effect of which becomes apparent only in hindsight. We thought the charts below are instructive in seeing the effect of shifts in currency pricing. The nearby lean hog futures contract is currently trading at around $78.2/cwt, a very high price for fall market hogs and well above the long term averages. Normally high prices are a useful signal in the marketplace that helps ration available supply. But that does not exactly work when foreign buyers see a price that is different from what US buyers face. Japan is the largest buyer of US pork and the bottom chart converts the futures contract price for US lean hog carcass into Japanese yen. While the Yen denominated hog futures are up compared to where they were a year ago, prices are still lower than the five and ten year moving averages. If you are a US buyer, hog prices are expensive, if you are a Japanese buyer, prices are kind of where they usually are.



A weaker US dollar will generally encourage US meat protein exports. While there is still plenty of volatility in global equity and currency markets, recent reports showing modest growth in a number of areas have once again pulled money away from US dollar denominated assets, thus pressuring the value of the US currency. A weaker US dollar benefits exports but it has the opposite effect on imports. The most evident case in this regard are US beef imports of Australian beef. The Australian dollar has once again started to gain ground against the US currency and it currently is at the highest level for the year. US end users are currently paying roughly the same price for Australian lean grinding beef they were paying back in May. However, their bids have eroded in value due to the weakness of the US dollar. Shipments from Australia to the US in September are expected to be down 22 per cent.