CME: Will Hog Prices Follow the Five Year Pattern?

US - Hog futures edged lower on Monday, with the nearby December contract down 87.5 points to $68.025/cwt, write Steve Meyer and Len Steiner.
calendar icon 20 October 2010
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Most other hog contracts also lost ground on lack of any bullish news and lower cash hog prices. USDA reported the IA/MN hog carcass price at $62.99/cwt. (weighted average), almost a full $1/cwt. lower than the Friday price and the lowest cash market price since February. The bottom chart (see below) may be a bit too busy but we ask your indulgence. It basically shows a range between the highest and lowest prices since 1999 (the green shaded area) as well as the daily prices for the 2009, 2010 and the 2004-08 average. The point in all this is that lower prices in October and November are nothing new, they have happened in some of the best years (such as 2004) and also in the worst years (such as 2009).

At this point, futures indicate that the cash hog markets will likely follow the five year average pattern, with prices expected to bounce back a bit in December from current levels. This does not have to be the case, however. In 2004, hog prices dropped sharply from mid September to mid October, but then bounced back in November and early December. Will this year follow the five year pattern or will it be more like 2004?

Much will depend on what happens with ham prices in the next six weeks. So far packers have been unable to put enough money on hams and ham demand has only been adequate. Light hams usually do well at this time of year as retail features provide a boost to the market. Light hams also do well because their supply is limited. The industry is producing ever larger hogs, which means that getting a 17-20 pound or even a 20-23 pound ham is becoming increasingly difficult. Larger hams, which make up much of the volume in the ham market, are now trading at an 11 cent discount to lighter ones. This is not unusual at this time of year but it is on the high side of the range. We will need to see higher prices for heavy hams going into November in order to get a boost for the cutout.

Also negative for cash hog prices at this point is the surge in the number of hogs coming to market. A big reason for the high pork prices late July and August was the shortfall in hog supplies, which caught many buyers off guard. We have shown the top chart (see below) a few times in the past but it helps show the dynamic in the hog market at present. The red line shows a rolling seven day total of the daily hog slaughter. On Monday, hog slaughter was 422,000 head, about 7000 head larger than the previous Monday and only slightly lower than a year ago. The seven day total was 2.270 million head, only 0.7 per cent lower than a year ago. At the start of this month, the seven day total was running as much as 8 per cent below year ago levels, which helps explain the sudden break in the cash hog market. Why the surge in hog slaughter? Cash corn prices have jumped 16 per cent in the last two weeks and they are up 44 per cent since July. Producers seem anxious to accelerate sales as that additional pound suddenly became a lot more expensive.

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