Hog prices climbing the wall of supplyHog prices climbing the wall of supply
Market analyst Dennis Smith looks at key fundamentals that are impacting the current hog market, driven by processors, a surprise Trump election and the weight of market hogs.
November 28, 2016
Several weeks ago, when hog futures were near their lows and most in the trade were concerned about slaughter capacity being met and exceeded, I decided to post a column focusing, instead, on the positives facing the hog market.
Little did I know this would coincide with a major bottom in the hog futures market. Little did I know that demand, not supply, would be the driving force taking prices off their lows and sharply higher. Little did I know that Donald Trump would win the election and kick off a huge bullish upward trend in commodity prices.
Since the election so many unexpected things have happened it’s difficult to keep track. The stock market has soared. Cattle, hog and soybeans — three commodities is excessive supply — have developed into impressive up trends. From a fundamental perspective, there was no one who I’m aware of that saw this coming. Specifically, I’d like to discuss the hog market.
The first key fundamental that appeared to engineer the impressive bottom in hog futures was the fact that pork processor margins have been hugely profitable this fall. As supplies of butcher hogs increased toward what the industry considered to be capacity, instead of slotting hogs and backing up inventory (and breaking the cash hog market), packers instead were willing to schedule overtime and run extra hours to accommodate the supply. Again, they were willing to do this because margins were profitable. They worked cash hog prices downward to 14-year lows, but the product (cutout) values remained far from a 14-year low. The most amazing aspect of this was the fact that product never did fall apart in the face of record-high hog slaughter.
The second key fundamental appears to have been the fact that in a huge surprise, Donald Trump won the election. This appears to have triggered a huge and unexpected surge higher in stock market prices. Investors are anticipating many developments, but generally they’re expecting an uptick in economic activity. Lower rates of unemployment, increasing wages and increased wealth all contribute to increased meat consumption.
Another unexpected element has been surging meat exports. Many of our large meat export customers, out of fear and respect of the new administration, have stepped up their meat purchases in a major way. The most obvious is Mexico. Mexico is our largest ham customer. Since Trump won the election, concerns regarding major revisions to the North American Free Trade Agreement and/or new tariffs on trade have prompted Mexico to buy a huge amount of hams. They appear to be stockpiling ham inventory for fear of trade restrictions in the event that NAFTA is revised.
The third key is that average hog weights have been edging lower as producers have been aggressively marketing hogs ahead of schedule. This has prevented a serious backlog in butcher hog supplies during November.
Only time will tell if serious trade restrictions are imposed on Mexico and China by the new Trump administration. Because we export nearly 25% of total pork production, it’s critical to keep our export market share. Most believe, and the slaughter data indicate, that U.S. herd growth and expansion remains in place. An expanding demand base, both in the domestic market and in the export arena, is critical to hog prices. Thus, while short-term demand has kicked into high gear, will demand hit a detour at some point next year?
Regarding the supply of hogs, the USDA will issue a quarterly hog and pig report on Dec. 23. This will be an important day regarding meat inventory. That same day, USDA will also issue a monthly cattle-on-feed report and a month cold storage report.
Finally, there’s a fairly reliable seasonal tendency for hog futures to top out during the last week of November, or this week. Because prices have been trending upward into the seasonal high timing, a peak or top in futures this week could be important to monitor. In surprise fashion, the front month December hog futures have moved from discount to the cash index to a substantial premium to the cash index. Thus, heading into the seasonal top timing it’s fair to say the futures market is filled with bullish expectations.
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