I departed for vacation with instructions to clients to sell every rally in lean hog futures while I was away, adding to exiting hedges. The seasonal high was not due until either side of the Fourth of July, but I specifically indicated that adding to hedges is so much easier as the market is working higher than after it has topped. Many commodity markets, including hogs, drop so much faster than they rally.
Little did I know that three days into my vacation the seasonal high would be scored and by the time I got back prices would be testing recent lows. So far recoveries off the lows have been anemic with the market finding a lot more bearish news to worry about than bullish news to inspire rallies.
This month I’d like to take a specific look at the December hog contract, technically, and then discuss what the fundamental situation appears to be.
Looking at a chart connecting the December charts over the years, one can identify the long-term range. In the porcine epidemic diarrhea virus year of 2014 the December hog chart put in a high at $105. In the fall of 2016, December hog futures posted a long-term low near $42. Currently December hogs are testing support near $55.50.
If/when the December hog chart takes out $55.50, on a closing basis, one can then expect a test of $47.
Fundamentally there appear to be major changes taking place that perhaps will impact the market for a long period. Consider the following bullets.
• Expansion continues and production next year is projected to be another record high.
• Slaughter capacity has expanded, but real competition has never materialized.
• Recently, packer margins have slipped into unprofitable territory.
• A lack of strength or power in the product seems to signal slowing exports.
• Recently July hogs went from premium the cash to discount the cash.
Through April, pork exports have been outstanding but this appears to be rapidly changing. We know that China is now out of our pork market. This is a direct result of the trade war and tariff dispute occurring between governments. It’s also a fact that the North American Free Trade Agreement has not been renegotiated. It’s also become evident that pork trade to Japan is slowing as a result of the United States pulling out of the Trans-Pacific Partnership. Pork producers and beef producers will face a major challenge if the administration slaps a tariff on imported automobiles as is currently being threatened. This would inflame Japan and South Korea, both of which are huge buyers of U.S. pork and beef.
This week the USDA will issue their quarterly Hog and Pig Report. Generally, the report is expected to confirm that moderate expansion remains in place and it should confirm record large pork production coming down the pipe for next year.
We knew the day would come in which expansion and record large production would begin to overwhelm demand, forcing product prices and cash hog prices lower and eventually triggering liquidation of sows and contraction in the industry. It appears this day is rapidly approaching. The graph below shows record large per capita pork supply in the United States.
Per capita beef supply has been increasing for the last four years and per capita poultry supply is record large. In fact, total meat per capita supply is record large. With meat exports disrupted this will push per capita supply higher. The only recourse, the only way to move this product, will be through lower prices.
There have been two very positive developments in the hog sector of recent. First, was the recent announcement by Seaboard/Triumph Foods that they will begin a second shift at their new packing plant in Sioux City, Iowa, starting in October. This is very positive news in that having this increased packer capacity available in the fall will prevent a backlog in hog marketings from developing. No one ever wants to see or experience a repeat of the fall of 1998. It should be noted, however, that the theory of increased packer competition raising the price for cash hogs has just never materialized, at least not as expected.
Second, the weather pattern in the Midwest looks conducive to producing another good to excellent corn crop.
The inability of the August, October and December hog contracts to penetrate their April highs this summer is a negative warning sign. The abrupt failure of the July hog contract to hold above the cash hog index coupled with fact that August hogs have been trading substantially under the index are negative signs. The fact that deferred contracts are testing key support during a period when they normally test resistance is a negative sign. In the face of record large production, the vast uncertainty surrounding the pork export market is a negative sign.
Finally, the abrupt end to the cash hog market rally early this summer is a negative sign. As stated last month, hedging production is highly advised.