CME: Market Participants Respond to Dramatic Decline in Cash Hog Prices

US - Hog futures have sold off quite aggressively in the last few days as market participants respond to the dramatic decline in cash hog prices, reports Steiner Consulting Group, DLR Division, Inc.
calendar icon 15 September 2017
clock icon 4 minute read

But why the sudden turnaround, after all wasn't excellent pork demand and new processing plants supposed to change the trajectory of hog prices this fall? We don’t think demand has changed materially although one needs to consider the impact of sharply lower fed cattle prices going into the fall.

Rather, the shift in hog supply availability, evident to anyone that has looked at a hog slaughter chart, appears to be the primary culprit. It also does not help that too often we think that just because we cut the ribbon on a new processing plant it will increase daily processing capacity by 20,000 head a day overnight.

It will likely take months before we get those plants running as they are supposed to and, in the short term, there is a few million extra hogs that will need to get processed.

The following chart shows the average weight of barrows and gilts for producer sold hogs. This number is reported by USDA each day as part of the mandatory price reporting system. It is a somewhat different number than the one reported by USDA in its weekly pork/hog production summary (SJ_LS712).

The reason for the difference is due to the way USDA calculates its weekly number, which is basically a moving average of the previous weeks. The USDA number also looks at all hogs, including sows. As we have stated many times before, in our view the trend in MPR barrow/gilt weights is a much more timely indicator of the weight trends than the weekly USDA report.

The data also allows one to look at the weight of producer sold hogs only, probably a more relevant indicator for those looking to understand the supply flow from farm to packing floor. The chart below reflects the weight of producer sold barrows and gilts and it represents a five day moving average. This allows us to smooth out the day to day variation.

If producers fall behind in their marketings, and they only need to do so for just a few short days, it will eventually show up in the weight data. Note the sharp increase in hog weights since mid-August. On 15 August, the 5-day average weight of producer sold barrows and gilts (all purchase types) was 207.2 pounds per dressed carcass.

On 12 September, the latest data point, that same 5-day average was 210.7 pounds. This may not seem like a significant increase but 3 additional pounds of pork on 2.3 million hogs slaughtered in a week represents an additional 8 million pounds just on the weight gain alone. More importantly, the pace of carcass weight gains has been faster than we have seen in recent years.

Since 2008, the average increase in the weight of barrows and gilts during this four week period declined by an average of 1.4 per cent. And that includes 2014, a year during which the shortage of available hogs caused producers to make up the PEDv shortfall by adding more weight on available hogs.

Anyone involved in the pork business knows that hog weights move up in the fall. Cooler weather combined with fresh corn helps bolster feed conversion in most farms. The issue right now is that hog weights are increasing a lot faster, and a lot earlier, than they normally do. And once you set a hog weight base at such high levels in early September, where will weights end up by early December?

We think part of the reason for the sharp erosion in cash hog prices has to do with producer efforts to try and get more current. What is a big unknown, and one that participants are pondering on a daily basis, is the actual number of hogs on the ground.

Is the increase in weights a short term issue that can be rectified by accelerating marketings for a few weeks, and accepting lower prices during this time? Or is this the first indicator of larger than expected hog supplies?

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