TFM Perspective 07-01-2022


Hog Herd on the Decline

The quarterly Hogs and Pigs report released on June 29 confirmed what most were expecting, a contraction in the herd and reduced breeding intentions. All categories came in 1% less than a year ago, confirming high energy and feed prices are reducing the hog supply. This, despite June futures reaching a high of $125/cwt (a multi-year high) earlier in the year. Additional driving forces in producers’ decisions to scale back are concerns that feed supplies could remain tight in the year ahead and higher interest rates will slow the economy and demand.

All hogs and pigs at 99% (99% of last year’s head at this same time) suggests that demand for corn and meal will retreat from the hog sector. The same is likely true in the cattle industry, where supplies are expected to tighten in late 2022 and 2023. In future USDA WASDE reports, expect feed usage to show declines from two sectors: reduced herd size and reduced usage per animal unit. The latter is open to debate, yet cost-conscious producers will likely market animals sooner rather than add extra weight. Without an actual strong economy (or at least the perception of one), the motivation to add extra pounds is diminished. Assuming the 2022 corn and soybean crops produce as expected, the bright spot is that feed prices have likely peaked. Yet, that may be a bold assumption, considering the most critical weather for growth and maturity is the next 60 days.

The bigger implication ahead for hog producers is marketing in a year of so many uncertainties. While the report should be supportive to prices, both consumers and speculators are navigating waters of uncertainty like never before. It will take a sharp pencil and consistent implementation of risk management tools for hog producers. Managing feed costs is paramount. While good crops are expected, they are not harvested yet. World supplies of grains are tight, and the war in Ukraine is unpredictable. Monitor feed prices carefully.

Though there are no guarantees, the July 4 holiday can often be a turning point for grain prices. Consider contracting feed needs through the end of the year or buying December corn or soymeal calls to manage upside price risk. If you forward buy, consider purchasing puts to protect the value of what you now own. Do this in the same contract months mentioned above. A strategy to consider for protecting hog prices is to purchase puts for a price floor, or contracting and purchasing call options to own if we experience a price rally.

Every year is a challenge, and this year is no exception. In fact, the months ahead could see wild price swings in both inputs and hog prices. Have in-depth conversations with your advisor to navigate what lies ahead. Consider the risks and rewards before entering into any strategy. Volatility can be frustrating and still present opportunities.

If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

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.


Bryan Doherty

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