TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
HOG PRICES SET TO RISE?
October hog futures have been in a steady downtrend since peaking in late March near $92.00 and currently near $60.00. With nearly half of China’s estimated pork supply wiped out due to African swine fever, conventional wisdom might suggest U.S. exports and price should be on the rise. Yet, hog futures have trended lower. Cheap corn prices and increased packer capacity have ballooned hog production. Daily slaughters are averaging close to 490,000. Just a few short years ago, 450,000 was considered large.
Pork, like other meats, is not readily exportable, as shipping and destination freezers need to be available. Yet, African swine fever has been prevalent for a year, suggesting shipping logistics have had time to respond. So, while the rest of the world experiences tightening pork supplies, the U.S. has plenty of inventory. Exports in recent weeks have been on the rise, helping to contribute to a year-over-year increase of 3.5%. Imports of pork to the U.S. are down 10%. U.S. hog producers have suffered losses this fall, suggesting supplies will tighten into next year. As China repopulates its hog herd, they will be doing so by retaining gilts further tightening supplies. The U.S. is set to experience growing demand. The futures market has it right. While nearby futures are struggling near contract lows, deferred summer month futures are trading near contract highs at $91.
Purchasing puts on deferred futures is a way to defend against lower prices. Risk is fixed to the premium and commission paid. The upside for price is unlimited. The fundamental set-up for higher hog prices is real. Be strategic, defending prices and leaving the top side open for price advances.
If you have questions or comments, contract Top Farmer at 1-800-TOP-FARMER extension 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.