pigs in pen

Hedge or not to hedge? That is the hog market question

There are several market drivers that are shaping fourth-quarter prices and hog producer margins throughout this period. The Chinese character, which depicts both danger and opportunity (as one character) comes to mind.

Live hog price volatility has been quite a surprise in recent weeks. The counter-seasonal moves in the market following significant declines through the end of September have been a welcome reprieve from large losses suffered during that time.

The expectation was that there would be big growth in slaughter numbers coming in the fourth quarter and that prices would be depressed. While we could go back to those levels, the improvement in cash prices and futures prices for hogs nearby and through 2018 have rallied. The hope is that everyone with an interest in those markets was watching and taking whatever action was appropriate for their operation.

In my opinion, there are several market drivers that are shaping fourth-quarter prices and hog producer margins throughout this period. The Chinese character, which depicts both danger and opportunity (as one character) comes to mind. Making the most of this opportunity requires some calculated risks, but as those in this business know, doing nothing is also a risk. These changes have me trying to understand the influence of pork supply, live hog demand, packer margins and other issues that impact the supply-demand in the pork sector.

What is driving this market?
Pork slaughter in the past two weeks is the main reason I decided to write on this topic. Expectations for fourth-quarter slaughter have seen an increase of 3.5% to 4.0% depending on which economist you listen to. Based on what I have seen, I would agree with that range. The fact is that the slaughter in the past two weeks averaged 2.5 million, which is up 1.2% from last year. Some packers have scheduled maintenance days or reduced Saturday slaughter relative to last year. One would think this is due to an effort to improve packer margins. We will get an answer to this question in the next few weeks. If slaughter weights rise it would indicate that we have market-ready hogs that are not getting to the market. If not, it will mean that the pigs were not on farms and expansion and/or productivity was not as robust as we thought.

Packer margins have declined since the opening of the new plants. The difference between cutout value and western Corn Belt prices were over $50 per head in September, and had declined to less than $25 per head in the last week of October. That difference has improved in the packer’s favor, by more than $10 per head in the first week of November. If their strategy is to improve margins, it seems to be working.

USDA Hogs and Pigs report from Sept. 1 would indicate that the growing herd, those over 120 pounds, expected to be marketed by mid-December, has increased by 3.9%. Slaughter from Sept. 1 to Nov. 4 averaged 104.1% over a year ago, which is just slightly ahead of what the USDA had projected. If those numbers continually prove to be accurate, we should have non-holiday week slaughter of nearly 2.6 million up until Christmas.

Health status in U.S. herds that I have knowledge of has been pretty good. Generally, this is the best time of year, when we are a long way from the porcine reproductive and respiratory syndrome breaks of last winter and not yet into this winter’s breaks. Recognizing that disease has potential to impact us year-round, it still appears much more prevalent in the winter months. Reports of reproductive performance and growing pig performance seems extremely good relative to overall prior years.

Futures markets have improved dramatically up until last week, before starting to fall back in the nearby months. Early November markets generally are not the time to extend a lot of coverage, but one has to consider where 2018 futures are and make an active decision of whether or not to hedge.Bang is a vice president of Swine Lending at Compeer Financial. For more insights from Bang and the rest of the Swine Specialist team, visit Compeer.com.

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