Complicated world out there

Bullish supply fundamentals will override all headwinds in the future.

Dennis Smith

October 4, 2021

3 Min Read
piglets hogs feeder.jpg

The U.S. and Brazil are the only main pork producing countries still standing with a disease-free herd. Sure, many countries in the European Union remain disease-free, but with ASF in much of Poland and now in Germany, the European continent is at great risk.

ASF is also now dangerously close to the U.S. as it has been confirmed in the Dominican Republic and Haiti.

Brazil has a BSE problem which is affecting their beef exports. But thus far, their hog herd is free from ASF.

The disease is in all of Asia, and it continues to pose problems in Russia.

Secretary of Agriculture Tom Vilsack recently authorized the transfer of $500 million to the CCC Commodity Credit Corporation in preparation for an “ASF event” in the U.S. The huge population of wild pigs in the U.S. will further complicate the situation. Regionalization will be attempted but with how much success. The bottom line: while the U.S. pork fundamentals are not that bearish, this is no time to be bullish and/or long lean hog futures. Now is the time to utilize the futures market for what it was designed for—the transfer of risk to speculators. 

The futures market has rallied sharply off the bullish news provided by the September “Quarterly Hogs and Pigs” report. Ironically, U.S. producers are the only producers in the world currently making money, and they’re still culling their breeding stock. This is in direct response to the impact of COVID-19 as well as the onset of serious PRRS problems. Sow units have been dropping like flies. Still, bullish supply news will likely carry the market only so far. Headwinds remain in place as discussed in previous articles. 

The major headwind is the acute labor shortage at the pork packing plants. Pork is more labor intensive than is beef. Pork requires more “further processing” of which there is simply not enough labor.

The second major headwind is the new law requiring a slow-down in chain speed. This safety measure effectively reduced the industry slaughter capacity by nearly 5%.

Another headwind is the slowing nature of U.S. pork exports, especially to China.

The nature of these headwinds is such that they are unlikely to change, improve or go away anytime soon. Thus, for the next three to six months, although producers continue to cull the herd, these headwinds will likely sponsor a down trending lean hog futures market. Of course, I’m not even mentioning the market reaction that would occur should a case of ASF be detected in Puerto Rico or in the U.S. This event, should it occur, would cause the export market to be closed, immediately, most likely for at least one month and possibly much longer. The trade reaction (lower) would be severe. My task is to prepare clients for this likelihood. 

The bullish trade reaction to the “Hogs and Pigs” report—more than 800 points upward and reaching 1,400 points off the contract lows—has most likely nearly run its course. Prices for December, February and April lean hogs are attractive from a breakeven standpoint. Profits can be locked in, and, in my opinion, given the headwinds in play, they should be locked in for fall/winter production. We continue to leave the summer of 2022 production unhedged.

With herd liquidation still occurring in the U.S. and with aggressive culling occurring in China, at some point in the future the bullish supply fundamentals will override all headwinds. 

The key is keeping ASF out of the U.S. As long as this remains the case, raising hogs should be a profitable venture over the foreseeable future.

Sources: Dennis Smith, who are solely responsible for the information provided, and wholly own the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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