Recent Cash Rally Could Well Continue

Much of the news in the pork industry the past few weeks has dealt with Chicago Mercantile Exchange (CME) lean hogs futures. They took a big hit in January as cash hog prices fell sharply and pulled futures, especially the nearby February contract, down with them.

The stars really lined up against February futures in mid-January. Soft pork demand (largely the result of very low chicken prices), higher-than-expected supplies, and the "roll" of commodity index funds out of the February contract all cast a very bearish influence over this contract. The decline in cash prices and February futures gave the impression the sky was in fact falling.

Some consideration, though, of other futures contracts show that, even though they may have taken on a bit of water, they're far from sinking. Figures 1, 2 and 3 are bar charts for April, July and December CME lean hogs futures. While none of these looked especially rosy prior to last week, it's obvious the summer and fall contracts didn't go down that much. Last week's rally took July and December back to within $2.50 of their contract highs.

FI hog slaughter finally got back near (in fact, below) both last year's and forecast levels last week. If that continues, the recent cash rally could well continue. It's already mid-February; spring and Easter are not far away. In addition, egg sets have finally fallen below year-ago levels and bring some hope chicken supply will decline and support recent anemic prices.

I still urge producers to watch these markets closely and keep tabs on what a rally means for return on equity. Set a realistic and meaningful objective and pull the trigger. The key is "realistic." What was realistic last year may not be this year.

CME Looks To Raise Daily Limit On Lean Hogs
CME announced last week it is contemplating increasing the daily limit on lean hogs contracts from $2 to $3. The move is motivated by some difficulties of hedge and index funds in placing and lifting positions in January when the February contract had two, lock-limit down days. Should that become more commonplace, those funds may not trade lean hogs, which would reduce liquidity and make it more difficult for hedgers to shift risk. Regardless of what you think of speculators and funds, they play an important role in providing liquidity.

It's important to also note the limit on the lean hogs contract is much lower in percentage terms than those of other ag commodities. The limit on corn is 20¢ on a roughly $2 item -- 10%. The limit on soybeans is 50¢ on roughly $6 -- 8% or so.

The purpose of limits is to force traders to slow down, take a deep breath and think about things rather than panicking. Walking a line between slowing down a panic market and allowing trading to continue is a tough call.

Another Record Export Year Is Official
USDA's Foreign Agricultural Service released December export data last week; another record year for U.S. pork exports is official. Of course, it was actually official in November when last year's record was surpassed in only 11 months.

Exports ended the year up 21%, and the value of exports was just slightly higher. That 21% more quantity at roughly the same unit price certainly means higher demand. Again we ask "And what do you plan for an encore?" Another record will be a tough act -- but we've said that before, too.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.