NHF Snapshot
Where do hog prices move from here?
Complicated markets, complicated times
By Dennis Smith
Forming a long-term pork outlook in the face of significant “noise” is difficult. I’m forced to ignore the current tariffs imposed by President Trump because the likelihood of these tariffs remaining in place long term is considered remote. My approach is to simplifybecause these are complicated markets and very complicated times.
The industry has been contracting the breeding herd in response to lost equity over the last 12 to 16 months. However, due to impressive efficiencies in raising hogs, production is not declining. Of course, I’m referring to the dramatic increase in the average pigs per litter that has been increasing to new record highs for several quarters.
Currently the USDA is projecting pork production this year to be up 3% versus last year. This projection does not seem to account for intense problems associated with porcine reproductive and respiratory syndrome throughout the hog belt. It’s my opinion that current projections are too high. The pigs per litter number may be accurate but the finished pigs per litter is likely overstated. It appears that the USDA butcher hog numbers have been overstated since October.
Cash hog prices are up 12% so far this year. The value of the hog carcass, the cutout, is up 7% compared to this time last year. Pork exports were record large last year and they’re projected to be record high again this year.
Pork in cold storage as of Jan. 31 is record low for modern times (going back 25 years). Frozen pork stocks are down 11% from last year and they sit 18% below the five-year average. Belly stocks are down 32% approaching the summer drawdown season. These fundamental facts tend to demonstrate that current pork production is not high enough to satisfy current demand for U.S. pork.
Lean hog futures tested contract highs in early February but have since sold off hard and fast. All contracts are trading below the average cost of production for the industry. In other words, currently the futures market is offering zero incentive for anyone to consider expanding the herd.
Global pork production is likely edging lower. The largest pork producer in the world, China, is suffering from a stinky economy and producers have been culling the herd in response to declining pork consumption.
African swine fever remains a problem throughout Asia and Europe. Pork production is the EU is stabilizing after a serious contraction in production over the last several years. Again, ASF remains in problem throughout much of the EU except for Spain.
Brazil appears to be the only country in the world that is currently expanding their hog herd. Brazil is like Canada; they export most of the pork they produce.
Where do prices move from here? Again, I’m forced to ignore the impact of tariffs because, in my opinion the use of tariffs by Trump is a negotiating tool. The odds of these tariffs being in place long-term, say longer than one or two months, are remote.
Based upon my outlook for butcher hog supplies this spring and summer to be well short of industry projections, I’m projecting that hog prices will move substantially higher into the June/July timeframe. Price strength after the middle of June should be used to establish hedges for the remainder of the year, assuming these to be profitable hedges. For a free 30-day trial to the evening livestock wire, please send an email request to: dennis.smith@archerfinancials.com.
Smith is a full service commodity broker specializing in grain and livestock trading with Archer Financial Services.
