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Where's the Hole in Hog Marketing?

With PED a major event affecting the hog market this year and, more importantly, a major influence on individual producers' decisions to expand or contract the herd, the outlook for hog futures has been very mixed. PED (porcine epidemic diarrhea) is a virus that has affected a percentage of the hog herd for 2014. It looks like the bulk of this disease has affected the herd in the January and February window. Theoretically, this would suggest supplies will be tightest in mid- to late summer.

The futures market has certainly reflected this concern with prices rallying from just over $100.00 to over $130.00 per hundredweight on the June and July contracts. June peaked in early March at $133.42, and July peaked on March 28 at $128.95. Since then, however, there's been a refocus on when the tight inventory may show, and June is now trading at $121.80. July, on the other hand, was at one point trading a $5.00 discount to June and is now trading well over a $6.00 premium, near $128.00. It looks likely that the tighter inventory will be in the July, August, and possibly October window. August is now trading near $127.00, and October is above $106.00. In March, October was trading at $84.

Since PED broke, there have been a number of discussions on how to handle this. Farmers have certainly been more perceptive in their handling of hogs, and movement of supply is critically watched and monitored. They've done an excellent job of trying to contain this disease. There is no cure yet. In addition, from a marketing perspective, the December deferred futures contract is trading near $95.00. We feel this is undervalued. PED could resurface sometime later in the year, especially if immunity wears off.

We are not sure producers are confident enough to expand their herds. Until there is a greater level of confidence that this disease is under control, supply growth is likely limited. Tight supplies may be alleviated to some degree by two events: hog weights and demand. Hogs are heavier with weights somewhere between 285 and 350 pounds. Prior to PED, dockage for hogs weighing much over 290 pounds was normal. This, of course, is dependent on individual slaughterhouses. In general, there is now an acceptance of heavier hogs. This will help to make up some of the short supply. Analysts seem to be split. Some are suggesting PED could affect as much as 8% to 10% of the herd. Others are suggesting it is closer to 4% or 5%. If the 4% or 5% crowd is accurate and weights are heavier, prices may struggle to move upward as total supplies could only be down 2% to 4%. The second event is that high prices will likely curb demand as well.

With the summer months trading near contract highs, producers should look for opportunities to establish a price floor in the market. This can be done through the use of puts, forward contracting, or hedges. If you choose forward contracting, consider buying out-of-the-money calls in case prices sustain a significant rally from current levels. Otherwise, the puts provide a flooring mechanism while leaving the top side open for increases from the cash market.

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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 whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.

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