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Pork production poised to challenge demandPork production poised to challenge demand

The negative implications of the USDA’s June quarterly hog and pig report are far-reaching in that production is certain to remain record large for the second consecutive year. 

Dennis Smith

June 27, 2016

4 Min Read
Pork production poised to challenge demand

The negative implications of the USDA’s June quarterly hog and pig report are far-reaching in that production is certain to remain record large for the second consecutive year. The negative surprise element of the report was contained in the size of the spring pig crop. Sows farrowed during March-May, at 2.90 million, were up 1% from the same period in 2015. In addition, another increase in the average pigs per litter, to a record high 10.48, pushed the March-May pig crop to 30.3 million, up 3% from last year and the largest spring pig crop in 45 years. This means butcher hog supplies in the late-summer and fall timeframe will be above expectations.

Reviewing the numbers, all hogs and pig were pegged at 102%, kept for breeding at 101% and kept for marketings at 102%. Again, the surprise element was mostly in the larger butcher hog supplies starting in late-summer. The kept-for-breeding at 101% was slightly larger than expected. This does indicate a cautious expansion, although certainly expansion.

Producers indicate they plan to farrow fewer sows this summer and next fall. This is where we get the idea of cautious expansion in that producers seem to realize they’re in the process of challenging demand for U.S. pork.

Thus, given these supply side inventory numbers, we’re expecting the USDA to likely expand their production projections for the third and fourth quarter of this year. The key question, on the backside of the Brexit vote, is what about demand? Pork exports are critically important to the pork industry with roughly 22% of production slated for export this year. Does the United Kingdom vote to leave the European Union change this export outlook? Much will depend upon the direction of the U.S. dollar. If the dollar, which rallied sharply in knee-jerk reaction to the surprise vote, continues to move higher, then U.S. pork exports will no doubt be hurt. Having said that, we’re not sure from an economic standpoint that the recent events will usher in a slowdown in economic activity.

Most likely this fear (global economic slowdown) is currently being overblown. The U.S.’s largest pork customers — Japan, Mexico, China and South Korea — may not be impacted economically as much as currently feared.

My column last month described hogs as a sleeping giant in terms of waking up. Indeed, we experienced a dramatic price rally from late-May to late-June. August lean hog futures moved from just above $78 to just above $90. Impressive as this move was, about half of these gains were quickly given up just prior to last week’s hog and pig report. So what lies ahead?

The fallout from the surprise move by Great Britain will be lengthy and difficult to determine. Former Fed Chairman Alan Greenspan indicated this decision is more dramatic and far-reaching than the stock market crash that occurred in 1987 (black Monday). Does volatility in the financial markets necessarily mean reduced pork exports and lower domestic demand? At this moment it appears we have more questions than answers.

Looking ahead, our lean hog futures road map goes something like this: The recent highs in lean hog futures will likely hold as the highs for the entire year. Pressure, in the form of rising production and an uncertain economic environment, will likely force hog futures prices lower into the late-August to mid-September timeframe. Any recovery in prices into early July should be considered hedging opportunities.

Immediately following the hog and pig report sources are indicating that pork packers are looking for butchers meaning the cash market into the Fourth of July holiday might continue to edge upward. The most recent CME lean hog index stands at $84.41. July futures, trading near $83.50 in the first session after the hog and pig report should uncover solid support and possibly work higher. Most active August lean hog futures will likely test resistance between $84.50 at $85 at some point prior to the Fourth of July. This should set up a selling opportunity for both the speculative type trader as well as the producer/hedger trader. In addition, our expectation is that heat during the summer months will continue to push average hog weight downward, providing near-term support for the cash market. 

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

Dennis Smith has been a full service commodity broker specializing in grain and livestock trading for over 25 years. Dennis has a wide range of customers many of whom are grain and livestock producers. Dennis and his partner, Patrick Garrity, develop and execute hedging and speculative trading strategies in their evening Daily Livestock Wire which is prepared each afternoon exclusively for their customers. 

Dennis grew up in Central Illinois and earned a Masters Degree in Agricultural Economics from the University of Illinois before launching his brokerage career.

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