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Selling front-month hogs

The hog futures market has priced in concerns which will likely be legitimate and recognized. We are referring to the PED virus that struck many hog producers in the winter months, and supply numbers should tighten into the late June, July and August. Yet, futures have been well ahead of the game and have anticipated this. June futures rallied to $133.00 but eventually went off the board closer to $115.00. July is currently trading near $128.00, its contract high established in March, at $128.95. August hogs have reached new contract highs this past week at $132.65. The August contract also represents a big premium to current cash prices and where June futures settled.

With the premium in the summer months, the question is whether or not tighter inventory will lead to higher prices in the retail sector. We don’t see much evidence of this. In fact, hog slaughter weights have been heavier than usual, and this is keeping an ample supply of pork available to the market. It's not unusual to hear that producers who normally ship hogs between 270 and 285 pounds, are now moving hogs closer to 300. In some cases, we've heard instances of hogs moved at over 330 pounds.

Therefore, from a supply perspective, we absolutely respect the shortfall of hog numbers that are expected. We empathize with producers who have struggled, losing inventory. Yet, we're not sure the consumer is ready to pay for high pork prices when expectations are that supplies will increase substantially by the fourth quarter of this year. This too has been reflected in the way futures have traded. Mid-summer futures months are trading as high as $130, and yet the December contract can't seem to move much above the mid-90's. Expectations are that supplies will rebound, perhaps strongly by the end of the fourth quarter. Why would retailers chase prices higher if futures are anticipating supplies to increase and be less expensive by fall?

If you're a hog producer, you should be looking to take advantage of higher mid-summer prices. A fence strategy is the purchase of a put and selling of a call. Call options in the upper 130's, or even to 140 in August, have premium that could be sold and used to offset the cost of the put. A put establishes a price floor on futures. Forward selling is another alternative that should be viewed as positive. Margins are good, and while supplies may tighten, there's no rule etched in stone that prices have to follow higher. Demand can simply take a breather.

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If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.

 

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Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider

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