September 3, 2021
When I approach the hog market from a fundamental perspective, I attempt to list all of the bullish fundamentals on one side and the bearish on another side. Then, I visualize a scale and attempt to quantify by asking which side weighs more? If the bullish list appears to outweigh the bearish list, a bullish hog market outlook is present. If the bearish factors appear to outweigh the bullish, a bearish market outlook is present. While elementary in scope, this approach works. At least it helps me. Boiling down the fundamentals to simple terms (which weighs more) helps to navigate extremely complicated markets.
The bullish fundamentals include the fact that we’re in a herd contraction, the fact that PRRS has been and continues to be a persistent challenge to producers, the fact that the economy is roaring as we continue to work back toward normalcy and the fact that frozen pork stocks are tight.
On the bearish side of the scale are some issues new to the pork market, and measuring their weight is extremely difficult. The bearish factors include the reduced chain speed as ruled by law, Prop 12 as voted into law in California, the success, or perceived success, in China rebuilding their hog herd which ties in with a slowing export outlook, and the perception that domestic demand for pork has slowed recently. Certainly, the slowing of domestic pork demand can be partially explained by record high belly prices this summer and sky-high pork trimmings prices, as well. Another bearish factor on the scale is continued labor issues at packing plants. The final, and quite scary bearish factor, is the very real possibility of an African swine fever scare in the U.S. Keep in mind if this disease makes its way to Puerto Rico, it will be considered in the U.S. and exports will be shut down for at least thirty days. This alone, is too much risk to live with.
Now, as I tap into my experience (I’ve been a broker for 35 years) my perception is that the bearish factors outweigh the bullish ones. I also note that the board (through price discovery every day) seems to agree with me. Look at the discounts that October through April are running compared to the CME lean hog index. For reference, the most recent index stands near $101.00/cwt. The October contract has been recently having a difficult time holding above $90.00. December futures are priced below $83.00, and so forth. Keep in mind that I don’t always agree with the board, but I do agree in this particular case, at this particular time.
As a pork producer, the key element to focus upon is profitability. Times have been tough, really tough. If the board is offering a profitable hedge, in my opinion, producers should lock in some profits and let someone else live with the risk for at least a portion of your projected production over the next eight to nine months. I’m not really in favor of hedging any summer production at this time and at these prices, with summer hogs between $93.00-$94.00.
From a feed standpoint, it’s also my opinion that the growing season that is currently wrapping up was not ideal and not capable of easing the tight ending stock situation facing corn. Thus, recently we’ve been actively establishing bullish positions in March corn options and bearish positions in December, February and April lean hog options.
Feel free to contact me if you’d like assistance in mapping out and executing some hedging strategies for your operation.
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.
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