Cash hog prices and pork cutout values are typically on a fast upward movement this time of year. However, this year that has not been the case. This article will explore a key reason why, hog production has been booming.
The May 10 USDA supply/demand report projected meat production to continue rising. Beef, pork and broiler production are all up from last year. National Hog Farmer writes,
Per capita supply is calculated by taking U.S. production, plus imports, less exports and then divided by the U.S. population. This provides a feel or measurement for how much meat needs to clear the consumer channels.
Lower per capita supply suggests higher average meat prices. Conversely, higher per capita supplies imply it will take lower meat prices to clear the product. Total per capita meat supply this year is pegged to be 220.4 pounds and next year is projected to come in at 223.7. Therefore, lower prices and possibly sharply lower prices may be necessary to clear this much product.
Clearing this much meat without experiencing lower prices could only occur under continued strong economic growth. While this is certainly possible, we’re becoming very concerned about the continued growth of the U.S. economy.
Several indicators suggest a peak in U.S. economic activity may be in the near future. For instance, copper prices have not been trending upward. Additionally, we have seen rising interest rates, labor shortages and labor issues in the packing and trucking industries.
There have been several warning flags raised in relation to hog markets and pricing structure. To date, the hog market has performed very weak from a seasonal standpoint. Typically hog futures, cash hog prices and pork cutout values are moving upwards this time of year. This hasn’t been the case this year.
Pork remains cheap and offered. Cold storage stocks at the end of April are up 8.6% from last year although they’re even with the five-year average.
Hog futures should be moving higher at this time of year. However, summer hog chart patterns have displayed nothing but a downtrend. June hogs peaked late in February. This was followed by a lower high in March, a lower high in April, and again another lower high in May. This is not typical of summer hog futures during the spring season. The seasonal peak usually occurs from mid-June to mid-July.
In addition to the record large tonnage, concerns exist regarding exports given a strong dollar and an obvious trade dispute with China. Recent tariff talk with Japan and South Korea could cause problems as well. This could be detrimental to the swine industry as both are huge buyers of U.S. pork.
There is also an acute labor shortage in the packing industry. The hog industry has seen intense, rapid expansion in harvest capacity.
A lack of workers to process a record large supply of beef, pork and poultry could cause severe bottlenecks to develop. If this happens, packers won’t be the losers. They will simply break cash prices severely. Packers won’t lose money in a grossly oversupply situation. It will be producers, the unhedged producer who will experience widespread losses.
With the industry trends, producers are expected to encounter marketing challenges the remainder of the year as pork supplies grow. The hog industry has grown productivity in response to increases in demand. However, productivity has caught up to increased demand both domestically and internationally.
Kent Bang of Compeer Financial says there are two strategies to help offset this imbalance in production and demand.
“We generally get a rally in the summer as supply drops. And I would look for that opportunity, not to hedge necessarily summer hogs, but to hedge fourth quarter pigs where we have the most difficulty in generating margins.”
He also recommends some options strategies to protect against possible catastrophic losses in the industry. With this strategy, you can at least protect some of the downside with options while also leaving the upside open if prices improve.
Image courtesy of Purina Mills