My opinion, based upon experience and observation, is that the timing on the high in the summer hog market will likely occur around the middle of July. I’d say either just prior to or just after the expiration of the July lean hog contract. Price wise, well, that’s impossible to guess. August hog futures topped at $90 last year. I doubt the August contract goes this high, but there’s a very real chance the July contract will exceed $90 into its expiration.
Actually that’s not a really bold statement given the fact that as of June 23 the lean hog index stands at $90.17. This marks a new high for the index and is substantially above the June 23 settlement of July hog futures which was $85.30. So from a basis standpoint or from a convergence outlook, something has to give. Either cash comes down or futures go up or a combination of the two events.
Also on June 23, the pork cutout value soared to a new high for the year, quoted at $101.15. This is impressive for several reasons. First, we’re dealing with record large pork production. Year-to-date hog slaughter is up 2.7%. Second, the cutout is higher than this time last year, higher than this time two years ago and stands at the highest level since October 2014. Recall that 2014 was the porcine epidemic diarrhea year in which hog prices and cutout values rallied sharply.
The obvious (or perhaps not so obvious) conclusion reached from higher hog prices and cutout values in the face of record large production is improving or strong to very strong demand for U.S. pork. When producers decided to expand the herd a year ago, they were counting on strong demand and sure enough here it is. Speaking of expansion, the USDA will shed light on the pace of hog herd expansion in the quarterly Hogs and Pigs Report slated for release on June 29.
One of the bright spots on the demand side of the ledger in the hog market has been rising pork exports. The most recent data contained export figures for April. April pork exports were up 7.6% from last year. Exports to our largest customer, Mexico, were up 12%. Pork trade with Japan was increased by 1%, up 25% to South Korea and up 4% to Canada. U.S. pork exports have been growing to some smaller markets at an impressive rate this year. For example, April pork exports to Australia were up 11%, to Colombia up 82%, the Dominican Republic up 55%, the Philippines up 149% and to Chile up 186%. These are impressive trends for the industry.
What is even more impressive is the fact that exports are surging in the absence of the Chinese market. Pork exports to China in April were down 23% from last year. While data from China are always a bit suspect, sources indicate that hog prices in China are trending lower as they deal with an oversupply. The United States has recently lost market share of Chinese business to the European Union and now it appears the total slice of the pie is actually shrinking. While this was unexpected, it’s important to realize hog production in China can be quite variable and unpredictable.
So, returning back to the futures market and the hard questions of time and price, what should traders and hedgers be doing in the market? First, if you’re a producer and you don’t own some October puts and look to add some December option window strategies, before the Hogs and Pigs Report, you’re making a marketing mistake, in my opinion. Any time you can establish a price floor above your cost of production during a year of record large production, while leaving the upside open, you’d be wise to do so. From a speculative standpoint, approaching July 1 with the CME lean hog index above $90 and August futures near $78, a feller should consider purchasing some call options to hold past the July contract expiration. Use my rule of thumb. Purchase an even number of calls, a total premium outlay that you’re comfortable with. If/when the premium doubles in value, liquidate half of the options and then you own half of the original position at no cost. Feel free to contact me with questions.