The rocket ship (lean hog futures) appears to be headed to the moon. Recall that I declared in January the hog market on a launch pad and ready for takeoff. I kind of had to apologize in early February as the rocket remained on the launch pad. Nearly the instant the article was posted in early February, we had lift-off, and hogs have been flying ever since. No more apologies. So far this year, lean hog futures have increased by 56.7%, leading all commodities. Corn, the major feed input in hogs, is in second place, rising by 52.9% year to date. So, while sharply higher hog prices are very impressive, it’s somewhat nullified by the fact that feed prices are also sharply higher.
In the wake of the disastrous 2020 year for hog producers, the USDA’s March quarterly “Hogs & Pigs” report detailed contraction in the industry, and no wonder. Breeding stock was reported at 97% of the previous year with sow numbers, down 61,000 from December and down 160,000 from March 2020. Not only was 2020 a debacle for producers, but losses for several years prior have triggered a major contraction in the industry. In fact, to date, weekly sow slaughter remains well above 61,000 per week, and during the week ending March 13, the sow kill reached 70,787, the highest sow kill in 602 weeks (September 2009).
Yes, despite the rocket ship performance of cash hog prices, the industry remains in contraction. The March “Hogs & Pigs” report indicated that March-May farrowings would be down 3% from last year and that June-August farrowings would be down 4%. The next “Hogs & Pigs” report is scheduled for release on June 24.
The USDA did not attempt to measure and quantify the nightmare that occurred one year ago during the COVID packing plant crisis. I’m not interested in reconstructing the carnage, but the fact remains that the USDA chose to ignore the fundamental situation and simply, instead, chose to “let the market figure it out.” This is exactly what has been happening since February. The USDA, in their April meat supply/demand table, finally lowered their pork production projection by 405 million pounds from the March projection. They’re now projecting production even with last year. This is still wrong, but at least they’re headed in the right direction. Analysts and producers making hedging decisions based upon the woefully incorrect USDA projections are clearly behind the eight ball.
Aggressive aborting of sows and euthanasian of baby pigs one year ago has created a massive hole in numbers both in terms of quantity and duration. My sources are indicating the butcher hog numbers are going to be substantially below year-ago levels all summer. Direct slaughter comparisons to last year are now not helpful as this time last year the slaughter slowed substantially as COVID hit the packing plants hard.
The latest CME lean hog index stands at $106.89/cwt. The latest calculation for the hog carcass stands at $110.46/cwt. Due to the inelastic demand for live hogs, cash hog prices have rallied substantially faster than the value of the carcass. Packer processing margins, highly profitable for months for both the negotiated open hog market category and the vertically integrated producer, have narrowed substantially. In fact, processing margins for open pigs are now negative while still profitable for the integrated producer. Make no mistake, “negative margin” does not imply a top in the cash hog market. It simply confirms that butcher hog numbers are in very tight supply.
Let’s cut to the chase. Where is this rocket ship headed? My long-stated upside target in June hogs is the range from $120.00-125.00/cwt. I’m assuming this level, or higher, to be achieved at expiration. In other words, both the February and April hogs expired on their highs. I anticipate the May contract to do the same at expiration on May 14, and I project the June hog contract to likely expire at or near its high.
Currently, I consider the whole futures market, June through February 2022, undervalued. All summer contracts are trading below May. June and July are slightly above the hog index, but August hogs are actually trading below the CME Lean Hog Index. There’s a clear reluctance for the futures market to endorse the current bullish fundamentals. The most logical reason for this, that I can fathom, is the remote yet very real threat that at some point in time we’ll experience an African swine fever (ASF) event in this country.
Looking at the pork carcass, the power in the cutout value has been sponsored by strength in the hams, bellies, trimmings, and ribs. Butts and loins have been firm, but I consider these key retail primal cuts undervalued. Eventually, large end users, including our major export customers, will come to realize this and aggressive procuring of butts and loins will sponsor another major leg upward in the value of the hog carcass.
Finally, no discussion of the hog market is complete without mentioning China. According to the Chinese, all is well with their hog herd as it is enjoying a nearly full recovery in hog numbers and production. Incredibly, many seemed to believe this, maintaining a bearish bias toward lean hog futures thus far this year. Two reports released last week are telling a far different story. A report released by the University of Missouri Food and Agricultural Policy Research Institute (FAPRI-MU) stated that Chinese pork imports, as well as beef and chicken imports, remain elevated as they continue to recover from ASF. Last week, the U.S. attaché in China released a report stating that it will be late 2021, at the earliest, before China successfully stages a meaningful recovery from ASF. This report is in sharp contrast to what the Chinese government has been saying. As for me, I’ll go with what the U.S. attaché says over what the Chinese government is telling me. I tend to go by what the Chinese do and not by what they say. Judging by the imports of pork, beef, chicken, corn, sorghum, soybeans, and soybean oil, it appears that China is facing a severe food insecurity problem that they’ll likely never admit to. Bottom line: anticipate U.S. pork exports to remain strong if not possibly record-high this year.
Source: Dennis Smith, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.