In the face of record large production during the fourth quarter, cash hog prices have outperformed nearly everyone’s expectations, product has been firm with most cuts in good shape, packer margins have been profitable and producers have not been taking a bath. Clearly, strong demand for U.S. pork has been the fundamental driver, steering the industry to profitability in the face of record large production. Nothing to worry about, right?
I’m concerned about a possible top in the lean hog futures market into the end of November for the following eight reasons.
1. The kills in October and November have come in less than projected by the most recent hog and pig report. It appears that packers are keeping the kill down.
2. Cash hog prices remain depressed.
3. Packer margins, after easing in October, are improving again in November yet the slaughter is not increasing.
4. Average hog weights are clearly increasing with the latest data showing weights up four pounds compared to last year.
5. My sources tell me that expansion remains in place in the major hog-producing states, especially in Iowa.
6. A record high national average corn yield and record high projected ending corn stocks as of Nov. 1 will encourage more aggressive expansion and continued feeding to heavy weights.
7. There appears to be a growing possibility that the North American Free Trade Agreement may go away next year.
8. The commodity funds continue to hold a large net long position in lean hog futures.
I have confirmation from several sources that packers are holding the kills down, restoring margins lost in October and bent on keeping margins highly profitable for the duration. Their logic and business model says they must reap excellent margins in the face of record large production. It’s simply how the packing industry works. Tyson Foods’ stock, by the way, continues to crank out fresh 52-week highs this month. Eventually this strategy will most likely result in backed up hog supplies, increasing weights and a severe break in cash hog prices.
The funds continue to hold a large net long position in lean hog futures. If they decide to lighten the load on this position before year-end, this selling could certainly pressure the market. In addition, we’ve recently learned that a group of Senators has requested that the Secretary of Commerce, Wilbur Ross, prepare an analysis of the economic impact on the agricultural markets in the event that NAFTA goes away next year. The possibility of this actually happening appears to be increasing. The tariff on pork will move from zero to 25%, on beef from zero to 10% and on chicken from zero to 75%.
Finally, there is a very strong and usually reliable seasonal for lean hog futures to top out in late-November and trend lower into the middle of January and sometimes all the way into the middle of April. It appears to me that this seasonal will likely occur this year.
If you need assistance in mapping out a hedging strategy please feel free to contact me.