The bearish Hog and Pig Report set the stage for continued large production. In fact, taking the information from the inventory report, the USDA increased projections for pork production this year by 405 million pounds in their January supply-demand report. Pork production for 2017 is projected to be 26.205 billion pounds, or up 5% compared to last year.
For the second consecutive year production will be record large. In the same report, export projections were left unchanged from the previous month, currently projected to be 5.440 billion pounds, or 4% higher than last year. While this is a good figure, the fact is production is rising faster than exports, increasing the total pork available to be consumed by the U.S. population.
Taking the supply information at face value, from the Hog and Pig Report, we expected hog futures to come under selling pressure in the days following the release of this information. Our more specific comments were to watch the market carefully given a test of the November highs. The first three sessions following the Hog and Pig Report the summer hog contracts indeed pulled back into the highs for November. The April contract pulled back, but bottomed out 100 points above the November highs and the February hog contract never came close to challenging the November highs.
Thus, technically, what I’m describing is a very strong market with the bull spreads also showing strength. The week ending Jan. 20 saw hog futures pull back off the recent highs while not really challenging major support levels. The seasonal tendencies suggest that hog futures should post a seasonal low by the end of the week ending Jan. 27. If the seasonal low timing is accurate, one can expect a seasonal high sometime in early March.
The bullish fundamental make-up of the hog market appears to be driven by several factors.
1. Due to domestic economic growth and vastly improved consumer confidence, the demand curve for pork appears to have shifted upward.
2. Due to low pork prices and improving global economic conditions, pork exports appear to be on the rise.
3. Producers managed to go through the holidays current in their hog marketings.
4. Historically high (profitable) processing margins have led to competition for animals as numbers begin tapering off slightly from the peak fall supply.
5. New packing slaughter capacity will come online later this year.
Detecting, understanding and predicting changes in demand are difficult for a fundamental analyst to comprehend. It’s difficult to measure, especially in the short term. Longer term, when production is rising and record large, yet prices are trending higher, it’s rather obvious that something has changed from a demand standpoint. Sometimes changes in demand can occur due to quality concerns, or changes in production in other countries. However, when demand changes, in this case increases as a result of consumer confidence and global economic growth, these tend to be longer term changes. In other words, the demand for U.S. pork is not likely to drop off anytime soon.
Having a discussion about upward trending hog prices while also digesting record large production is somewhat rare. In my opinion, however, this is “the real deal” and demand is not likely to fade quickly. A shift in demand appears to be impacting beef as well as poultry. In the grain market, despite historically large projected ending stocks, corn prices recently penetrated several layers of resistance on the long-term shorts. Soybeans, recently, staged a gap on their weekly price charts. These new trends appear to confirm our outlook that demand for U.S. pork, as well as demand for several other commodities, has shifted upward. It also appears to be long term in nature.
The bottom line of this discussion is for producers to keep a close eye on their bottom line. During a period of record large production, if you have an opportunity to lock-in profits, this should be seriously considered at least for a portion of expected production. Remember, the first and foremost responsibility one has when running a business is to make sure the business is still viable in the future. My rule of thumb when it comes to hedging should also be considered. This rule states when hedging production in an up-trending market utilize options. When hedging in a down-trending market, one can be more willing to sell futures. Hogs are currently in a well-defined up trend.