September 4, 2020
On Sept. 3 both October and December lean hog futures gapped higher and neither contract filled the gap during the entire session. The chart pattern is bullish and showing a symmetrical pattern consisting of a series of higher lows. On Sept. 3 the front month October moved from discount to the CME lean hog index to premium the index in quick fashion. So, what is the board anticipating?
Fundamentally, it appears a combination of factors may be at play. First, average hog weights are declining rapidly. This is likely a function of hot weather and the fact that hogs are on a racto-free diet this summer. In addition, it also appears highly likely that the industry has successfully moved through the backlogged butcher hog supply. Second, my sources report that packers are unsure exactly what the hog supply is moving forward.
How could this be? This hints at uncertainty created by euthanasia of baby pigs last spring in combination with aborted sows that we heard was occurring during the COVID crisis at packing plants in April and May. These numbers were never quantified by the industry and now it's up to the market to sort it out.
Third, the export boom led by China remains in place. The Chinese have shipped 500,000 metric tons of U.S. pork and they have another 93,000 on the books for this year. Mexico, our second largest export customer, has shipped 327,000 metric tons with another 70,000 on the books. Pork exports will be record high this year and next.
Domestically what is happening to pork consumption is difficult to interpret and predict. Foodservice demand remains deeply depressed. This is a big component of ham and belly demand. So, the vast majority of pork consumption must take place at the retail grocery outlet. Consumer confidence has recently dropped sharply. My sources have indicated this means fewer trips to the grocery store with the intent of spending less on each trip.
We are in recession. So, does this mean that cheaper price pork will win out over higher priced beef? We're not sure. Keep in mind with foodservice nearly completely shut down, we're in uncharted waters. We do know that October is National Pork Month and currently retailers are actively booking cheap pork in preparation.
Many producers that I talk to suspect the June Hogs and Pigs Report was not accurate in the sow count. So, they further suspect the kept-for-market hog category is also overstated. The September Hogs and Pigs Report will be released Sept. 24. The most recent monthly cold storage report was friendly showing total frozen pork stocks down 25% from last year.
Finally, it's important to understand and realize that U.S. pork is currently the cheapest and without a doubt the highest-quality pork in the world. U.S. prices are roughly half of those in Germany. In addition, most barriers to pork trade have been lifted. So, in the months ahead it's critically important that the United States export as much pork as possible. It's also important, if not critical that the industry stop expansion and allow prices to rise above breakeven for all producers. We're just coming off a seasonal low (end of August) with the next major seasonal high toward the end of November or early December.
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.
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