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The moon is in sight!

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Long-term bull market is likely not finished, perhaps not even close. 

The spaceship “Hog Market” lifted off in February, and the craft is approaching its zenith—the moon is in sight. The low end of my long-held upside target in June hogs was achieved last week at $120.00/cwt. My upside target was $120.00-125.00, and there’s still fuel in the booster. After the June hog contract goes off the board, my final upside target basis the July hogs will be the range from $130.00-$132.00. Nothing goes up forever, and a substantial correction at some point will be warranted. However, the long-term bull market is likely not finished, perhaps not even close. 

The June “Hogs & Pigs” report, to be published Thursday, June 24, will be an important inventory report to monitor. Currently the USDA, evidently using models based upon producer profitability, is projecting expansion and rising pork production in 2022. I beg to differ. The USDA, in my opinion, is grossly underestimating the level of carnage sustained by the industry in 2020 and the two years prior. The USDA does not have a grasp of the disease problems plaguing many producers. A dangerous strain of PRRS has and is still hitting large farrowing units. The results in the wake of PRRS is disastrous. To date, this devastation has not been measured by the USDA. It’s been solely up to the market to factor in the problem. In my opinion, this has led to far too much hedging early in the stage of the bull market. These producers have been “run over” by the market action. Indeed, basing decisions solely upon USDA data can be dangerous. 

What a difference thirty days can make. The last time I tapped the keyboard for this article, the CME lean hog index stood at $106.89 and the value of the hog carcass was measured at $110.46. Today, the CME lean hog index stands at $114.75 and the carcass is quoted at $132.63. The math majors in the crowd will quickly notice the trend. Cash has only ticked up $7.00 whereas the carcass has appreciated by $22.00. Recall last month when I indicated that packer processing margins had narrowed dramatically on open pigs. Well, packers have successfully restored those margins by sitting on the cash hog market while the cutout values zoomed upward. 

Last month, I projected that loins and butts would soon lift off and drive the cutout higher. Butts have exploded higher. On May 7, the 14-18 ¼ inch trim loin was quoted at $1.21/lb. On June 4, this primal pork cut was quoted at $1.35. On May 7, the pork butt was quoted at $1.33/lb. On June 4, this primal that had been quoted roughly even with loins for weeks, was quoted at $2.15. So, math major, help me out. The loin has appreciated by about 12% over thirty days, and the butt has soared in value by 62%. Nice! Keep in mind that frozen belly stocks are very tight and the odds of fresh bellies dropping in value over the next thirty days is remote.

Finally, no product discussion is complete without analyzing hams. Keep in mind, hog traders, that lean hog futures are highly correlated with ham prices (85 cents). Heavyweight bone-in hams appeared to top out about thirty days ago, causing some concern. On May 7. the heavyweight bone-in hams were quoted at 87 cents/lb. Indeed, hams formed a bottom and are currently recovering. The latest quote, as of June 4, is 94 cents/lb. So, after declining and since recovering, they’ve appreciated by 8%.

There is something else worth pointing out in the ham market that many in the industry do not realize. The most recent USDA “Cold Storage” report, for inventory as of April 30, showed the inventory of bone-in hams at 22.1 million pounds, down 33% from last year and record low. The startling aspect of this statistic is the fact that bone-in ham production has been larger than normal because of continued labor issues at most packing plants. For several reasons, packers can’t keep plants staffed. They’ve dealt with this problem by reducing the boning lines, in effect producing more bone-in product. I attribute the impressive disappearance in hams mostly to exports, specifically exports to Mexico. The data is not yet available to verify this last statement. Pork exports started off the year very slow. Pork exports to Mexico, our second largest customer, during January-February were down 6.7% compared to last year.  

Talk is cheap. What does a producer do, if anything, in the lean hog futures market to deal with the risk of lower prices? Until the last couple of sessions, we’ve been totally unhedged in hog futures. Until two sessions ago, I have not recommended one hog hedge this entire year. This strategy has worked well, saving our clients a ton of money. The only hedges we’ve executed is for a portion of expected fall production. My concern here is not with supply, not with exports, and really not even with domestic demand. My concern is with the California Prop 12 ruling and with the recent court ruling forcing packers to slow the chain speed. Prop 12 is scheduled to go into effect January 1. The court ruling, in effect, reduces slaughter capacity by about 3-5% When we start the fall hog runs, assuming there will be one, this could create some problems. 

Other than some hedging in the October options, we’re leaving everything else open until after the quarterly “Hogs & Pigs” report. I’m expecting a bullish report, but who knows what the USDA will come up with.

Now, there is one exception. One must always be aware of the threat of an African swine fever event in the U.S. market. If this happens, or more accurately, when this happens, until the situation is sorted out, we’ll lose our export market overnight. Suddenly, the domestic marketplace will have 26% more pork to digest. Lean hog futures can be expected to post limit losses for several days. To prepare for dealing with this possibility, I’m recommending that clients purchase, in large quantity, the August lean hog 90 puts. This will provide some measure of protection until the middle of August. If someone can come up with a better ASF event hedge strategy, I’m all ears. If you need help in developing and executing hedging strategies, please contact me. 

 

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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