Another rocket has been launched

Key for hog producers, in this bullish environment, is to seek some protection yet leave the upside open.

Dennis Smith

January 31, 2022

6 Min Read
Another rocket has been launched
National Pork Board

If you've been following my monthly articles, you may recall the rocket launch that was projected last January/February. Indeed, hog prices shot sharply higher with the peak reached in late June. The peak was just above $123, a sky-high price even for the summer hog market. Last year the June 21 hog chart bottomed out in November around $77. The current June contract, June 22, put in a bottom in November, $11 higher at just above $88.

In my opinion, summer hog prices this year will surpass last year by a substantial margin. The key for hog producers, in this bullish environment, is to seek some protection yet leave the upside open. It's critically important to not cut your profits short over the next couple of years.  

Year-to-date hog slaughter is running 11% below the same period last year. I've just learned through my sources that the Tyson pork plant in Waterloo, Iowa is canceling all Saturday kills for February. Margins remain profitable, in fact historically very profitable. Sometimes canceling Saturday kill shifts happens in the summer but rarely does this occur in the middle of winter. The only reason they would do this is because there are no pigs to kill. The sharp downturn in the year-to-date kill, in tandem with the fact that average hog weights are not rising, is confirmation of an acute shortage of butcher hogs.  

Why the shortage of hogs? Multiple sources have been indicating that porcine reproductive and respiratory syndrome, porcine epidemic diarrhea virus and porcine deltacoronavirus have been presenting extreme challenges to large integrators in the U.S. pork production system. The U.S. producer has been culling the herd in the wake of the COVID disaster and the huge losses that followed.

It appears highly likely that the USDA Hog and Pig Report, as of Dec. 1, was way off the mark. The breeding herd is likely overstated and the survey, evidently, did not pick up the disease problems challenging the industry. One clue to this "miss" was contained in the high "pigs per litter" contained in the report. This data just simply did not match up with what I'm hearing from many sources. Now, the slaughter data is verifying.  

At first, when the kills started diving, packers used Omicron as a ruse, a reason for the downturn in the kill. However, as the kills were dropping, instead of breaking the cash hog market as would normally be the case when something was preventing hogs from being slaughtered in a timely fashion, packers were bidding aggressively and driving the cash upward. This move started at the end of December, and this was the first clue that something bigger than Omicron was at play. At this time February hogs broke to below $80 (on Friday Jan. 7) yet I made the projection (in my Evening Livestock Wire) that February hogs would test $90 before going off the board. The recent high in February hogs is $88.75 and the contract has two more full weeks to trade.  

The pork situation in the European Union is dicey to say the least. African swine fever is jumping around Europe at a scary pace. After spreading in Germany, several confirmed cases in wild boar have recently been confirmed in northern Italy, 500 miles from the closest case in Germany. It is well known that this disease travels by people. Trains crisscross Europe without any border checks. In my opinion, it's only a matter of time before ASF is confirmed in France. This situation will have to be monitored closely.  

The situation in China remains shrouded in mystery. PIg prices keep falling in China with prices well below breakeven for the entire year of 2021. Huge losses have been absorbed by the industry. There's talk of zero credit for hog producers leaving no choice but to cull, to liquidate the herd. This massive liquidation is likely causing gross over-production. At some point liquidation will end and hog prices are likely to rally sharply. I anticipate the Chinese to remain major buyers of U.S. pork in 2022. Thus, China remains a major wildcard in the coming weeks.  

Closer to home, the boondoggle known as California's Prop 12 was delayed by a California court for six months. It is unclear how many hog producers are seriously changing their operations over to meet the stringent requirements for raising hogs. So, the kick the can down the road allows us to forget about it for a while. 

Labor or an acute shortage of labor at packing plants continues to be a problem, or so we've been told. The labor problem has been clear when observing the volume of trade in bone-in hams. When labor is terribly short, packers cannot run the boning lines which then creates a glut of bone-in product. Bone-in hams dropped in price to $0.40/pound. Volume of trade was huge as Mexico was in snapping up the hams. We believe Mexico has been taking in the bone-in hams, processing them and exporting the boneless product, some right back to the United States. So, Mexico has been helping to solve the labor problem and it's been highly profitable for them to do so.

Recently, however, as slaughter is dropping, the volume in bone-in hams has been declining substantially yet prices have jumped over $0.10/pound. This is an indication that labor is more plentiful and they're once again running the boning lines.

Another little talked about item that will help solve the labor shortage is the waiver available whereas packers will be allowed to increase the chain speed for up to a year. Of course, a lower supply of hogs will solve the labor issue for the packer. The problem for the packer, however, is that eventually this will force margins to narrow.  

As mentioned above, U.S. producers need to prepare to take full advantage of the opportunity at hand. This means not cutting profits short yet using sharp rallies to establish a profitable price floor. The method we plan to utilize is puts and more specifically put spreads. If you need assistance with the mechanics of this hedge or help with the timing of such hedges, please send an email or pick up the phone.  

My upside targets are incredibly high. My first measuring target in the April hogs is $111. I can visualize the summer hog futures moving above $120, most likely above $125 and possibly as high as $130. Another rocket ship is in space.  

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.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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