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Addressing the key questions from last month

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A full leg down in corn prices coupled with strong summer hog prices (if China returns) could restore profitability to most pork producers by third quarter.

Last month I identified three key questions that pork producers should be thinking about and searching for the answers. These were: 

  1. Corn prices; will they remain elevated during most of 2023? 
  2. Will China import large quantities of U.S. pork in 2023?
  3. Will recession hit in 2023?

Just last week the corn market appeared to be giving a clue regarding the first question. On Wednesday, Nov. 30, the last day of the month soybean futures rallied sharply and penetrated the highs made earlier in the month. Corn futures were not able to follow along as they remained well off the early November highs. In fact, on Tuesday Nov. 29, March corn formed a doji pattern which is a pattern predicting a change in direction. Sure enough, the following two sessions corn futures collapsed, taking out the November lows and several layers of support.

The chart pattern is bearish and strongly suggests that corn prices are now headed lower, moving toward a new range of trade and leaving the $7 level. I'm expecting March corn futures to decline all the way to $6.20 before showing some stability. It's highly likely that the selloff will extend even further than expected, perhaps clear down to $5.50 before establishing a new range of trade prior to the U.S. growing season. 

A full leg down in corn prices coupled with strong summer hog prices (if China returns) could restore profitability to most pork producers by the third quarter. If that happens then possibly, by the fourth quarter some plans for expansion could be underway. However, that's a long way off and certainly no cause for concern at this point.

The December Hogs and Pigs report will be released on Friday, Dec. 23. I'm expecting this report to be neutral at worst and most likely somewhat friendly. There should be zero evidence of expansion in this report. 

Question number two is concerning China and whether they'll enter the U.S. pork market at some point next year. Last month I stated that I thought they'd be importing U.S. pork by early next year. Well, Chinese pig prices have peaked and are edging back down slightly.

Also, currently U.S. pork prices remain too expensive to justify large imports. In the face of the 25% tariff that remains in place, the math simply does not work yet, although it's getting close. Currently ham prices are trading on either side of 90 cents/pound. If prices drop another five to 10 cents, the Chinese may begin to sharpen their pencils and placing orders. 

If/when Chinese pig prices stabilize and start heading back upward, the math will change rather quickly. Recent data released by the Chinese government indicated sow inventory slightly higher than one year ago, up less than a half a percent. There is no telling how accurate this information is. It's always important to watch what the Chinese do not listen to what they say.

Three years after the pandemic started, China is currently battling COVID. The policy of zero tolerance appears to be a total disaster. An interesting opinion piece in the Wall Street Journal suggested that zero tolerance was put in place to delay the pandemic (in China) until after XI could secure his power and standing for another term. Well, he's now done that. So, the speculation is that zero tolerance will soon go away.

Can you imagine the pent-up demand that could be unleashed if China were to ease restrictions across the nation? Evidence is compelling that sometime in the first quarter COVID restrictions will pretty much go away. This situation could potentially ignite a huge rally in U.S. hog futures. 

Regarding the final question, will recession hit the U.S. economy during 2023 is certainly a complex issue. In my opinion, the odds of recession next year are remote. Perhaps sometime in 2024, but likely not in 2023. The labor market remains very tight. Job growth continues at an impressive pace, averaging just slightly lower than during the first half of the year. The rapid rise in interest rates will start to ripple through the economy by the second quarter of next year. But  barring some major event, it appears the U.S. economy will continue humming  along through the first quarter.

The current unemployment rate, at 3.7%, remains historically low. There are still two open jobs for every person unemployed. This is unlikely to change dramatically over the next few months.

Meat demand should remain strong. So, in my opinion, the U.S. economy will not be a bearish factor impacting hog prices during the first half of 2023 and perhaps won't become a negative factor during the entire year. 

Regarding the near-term direction of lean hog futures, I'm looking for a seasonal low soon, somewhere between Dec. 9 and Dec. 16. December hogs stabilized in the $81 -$82 as projected last month. February hogs may test the recent low again, just under $84. I doubt they'll move much lower, and I highly doubt they will drop all the way to a gap on the chart just under $80. 

This gap will remain unfilled, in my opinion. 

Dennis Smith publishes his evening livestock wire daily for clients and subscribers. For a free 30-day trial send an email to [email protected].

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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