Lean hog futures: Searching for something positive

During times like these, while not willing to abandon positions established with the trend, especially hedge positions that are protecting hogs, open your mind to the positive fundamentals facing the market.

Dennis Smith

October 24, 2016

3 Min Read
Lean hog futures: Searching for something positive

These days it’s real easy to list and identify bearish factors facing the hog market. Record large production this year and next, record large poultry production this year and next year, rising beef production, slaughter capacity challenges in the weeks ahead, the fact that producers are still expanding their productive capacity, the recent upside break out in the U.S. dollar … so on and so on.

If you focus hard enough on these factors you begin to wonder why hog prices aren’t even lower than they are. During times like these, while not willing to abandon positions established with the trend, especially hedge positions that are protecting hogs, I like to open my mind to the positive fundamentals facing the market.

The first and most obvious long-term bullish fundamental facing the hog market is the planned expansion of slaughter capacity slated for next year. Did you ever ask yourself; why the expansion? First and foremost is the theory of expected profit. Second, the packers and producers engineering this expansion must have firsthand knowledge of powerfully strong pork demand coming down the pipe.

The last sentence leads to the second long-term bullish fundamental — the expectation among the packers that they will be facing record large demand for U.S. pork. We are talking world pork demand more so than domestic demand. Millions of dollars being spent on expanding slaughter capacity would not be in the works if such demand was not already being felt by the packer. Narrowing the scope of this last statement, in consideration of current cash hog prices, one must be wondering why cash bids have not cratered, why the pork cutout value has not dropped like a stone in the face of record weekly slaughter totals? In the short term, meaning in the next few weeks, a crash in both could occur if butcher hogs have to be slotted. Beyond that, it appears that demand for high-quality and dependable U.S. pork will rise to the occasion.

From a world demand standpoint, the United States has been beaten by the European Union for the lion’s share of Chinese pork demand. Recent data shows the EU has captured nearly 70% of the Chinese pork trade. This leaves 30% of the pie to divide between the United States, Canada and Brazil. The job of U.S. producers, pork associations and politicians is to expand the percentage of U.S. pork going to China.

I’m not an expert on these trade issues, but this is the crux of the demand situation that will make the difference between profits and losses for producers over the next several years. I’m attempting to highlight this in an effort to stimulate discussion, conversation and leadership in these critical trade issues.

Taking this a step further, given that producers are the likely audience here, I urge you to contact your National Pork Producers Council representative and demand answers to these types of questions. We need leadership in the export arena. U.S. producers can’t allow the EU to be the dominate provider of pork to China.

Domestically, pork is in a good position to compete with both beef and poultry. Beef is at a clear disadvantage due to the very slow process of lowering retail meat prices in the U.S. market. The strength and/or weakness of the U.S. economy is important in clearing premium meats at the restaurant level. Again, sluggishness here likely hurts the beef boys more so than the pork producers. Beef, frankly, has way more problems in the domestic market than does pork.

In conclusion, if the United States can edge the percentage of total pork production exported from the current 23% to 24% toward 28% to 30%, it will mean the difference between handsome profits for the industry or widespread losses at the end of the current expansion.

I present this column to stimulate conversation and focus on the positive fundamentals facing the U.S. hog market and away from the negatives. 

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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