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Lean hog commentary
Hog futures were unable to hold those strong price gains made in the first three days of the week. The dominant contract, October, only closed up $1.02 (December +$1.25), and the Zilmax issue for the cattle market will not leave that much of a production hole for pork to fill. It is good news in a very minor respect.
The June trade data was certainly good to see. June exports were only 1% lower than last year. In the previous seven months they ranged from 4% to 18% lower than last year. Imports were not too good with three months in a row of higher than last year figures. So with good news on exports and slightly good news from Zilmax, we are talking about downside? The issue here is not about good news that applied to the past. The concern here is about the future. You cannot get overly bearish from supply numbers yet. Hog slaughter will run about even with last year all the way through November. With cool weather you could argue pork production (slaughter numbers times carcass weight) may run about 1% higher. So for the short term, we are certainly bearish cash hogs but must figure that futures have the correct discount dialed in.
The month of December, and on through 2014, is where the transition will hit. Before the PED discussion, you can project slaughter around 2% higher than last year and pork production perhaps 3% higher (heavier weights). Allendale computes that PED could bring slaughter numbers back to even with last year for December and January. Others in the industry suggest a PED adjustment will actually bring it down to below last year levels. Our numbers suggest $80 for a downside target for December futures. If you plug in the worse of the PED scenarios you are looking at $85 to $87 December hogs.
We can certainly see both sides of the winter pricing argument. Our real focus right now though is 100% on the 2014 contracts. Using our bearish projections of grain prices we are projecting much of 2014 to see hogs breakeven of $75 per lean weight. To us this is just too much incentive for the vast majority of producers to pass up. In summary, the rally we discussed from mid July to early August has happened. It even got a little better than we had hoped. However, now it is time to focus on the downside. Producers who simply don’t want to hedge the winter’s markets due to PED concerns are strongly encouraged to take a look at the spring and beyond period. We remain 100% hedged on hog market reports through August 2014.