Summer hog futures rallied sharply in late April but they failed to take out the early April contract highs. Futures have sold off nearly 800 points in just eight trading sessions. The next seasonal low is due in a couple weeks. Will a secondary rally provide a chance for producers to hedge production at profitable levels? If not, major trouble lies ahead.

Several months ago, Federal Reserve Chairman Jerome Powell stated that it was important to get inflation under control before it changed people's behavior. It appears that that time has come and gone. Recent data presented at the annual meat conference in Nashville, as compiled by research firm Circana, indicated that the sustained impact of several years of inflation has caused shoppers to buy meat products on sale and adapt the amount, type cut and brand of the meat and poultry they purchase. Inflationary pressures have forced consumers to buy meat less frequently and to buy less per purchase last year compared to 2022. The study went on to demonstrate that food and beverage prices in 2023 compared to those in 2019, before the pandemic, showed that people are spending 32% more on food and beverage. With all due respect, Mr. Powell, you’re too late. Consumer behavior is already changing.

That’s not all in terms of headwinds. If Donald Trump is elected President in November, the tough talking former President has already stated that he will pick trade wars with China, Mexico and Europe. The pork industry is deeply vulnerable given that Mexico currently accounts for 40% of all U.S. pork exports amounting to 10% of total production. A trade spat with Mexico will not end well for U.S. pork producers. While pork exports are up 8% year to date, recent data indicates a vast slowdown in pork exports to Mexico. We’ve yet to determine if this is a reaction to the weakening Peso or if a longer-term trend is being established.

Another headwind recently confirmed is a slowing U.S. economy. A couple weeks ago the commerce department confirmed that GDP growth in the first quarter was slower than expected. In addition, employment growth is also slowing. During all of 2023 many were convinced of recession. It never happened. Now, instead, we’re experiencing a slowing economy with continued inflation, or stagflation.

Many inexperienced commodity traders and some experienced traders believe that commodity prices will head higher simply because of inflation. But inflation over time erodes the purchasing power of the consumer. It changes behavior. It forces people to consume less. Indeed, in my opinion, a slowing economy, continued inflation and the high potential for trade wars will allow the bottom to drop out of most commodity markets by the end of 2024. This will include pork.

Granted, pork has a price advantage over beef but not over poultry. So, in this case pork demand may not be as severely affected as beef demand, but it will be affected.

Under this scenario, the next rally in lean hog futures, one that likely peaks by late June or early July, could well be the final rally before a long-term bear market develops. The contraction in the industry over the last nine to ten months has simply not been nearly enough to restore profitability to the industry. In fact, it’s not even been enough to force production lower. Can one even call it a contraction if production never drops?

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