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What Happened to Hogs?

08/08/2014 @ 3:28pm

Hog futures were in a steep and extended uptrend for many months after PED (Porcine Epidemic Diarrhea) virus broke in January, affecting many hog producers. Initial estimates suggested a reduction in hog supplies by 4 to 6%, and, in some circles, estimates went up to 10 or even 15%. Yet, year-to-date, hog production is down roughly 1.13%. Hog futures prices are now entrenched in a steep downtrend since peaking in early July. As of this writing, October hogs are trading near $101.50, well below the recent peak of  $118.35, or a loss of nearly $18.00. Front-month August hogs peaked at $133.37 on July 1 and is now trading under $116.00, a $17.00 drop.

So what happened? As with any market anticipating a short-fall of supply, we believe two things occur. Both can relate to the basic laws of economics. In essence, high prices cure high prices. First, high prices led to behavior by producers that wasn't anticipated. Both packers and producers agree that heavier hogs could help fill the void of small supplies. While slaughter numbers have certainly been on a decline the last six to eight weeks, fulfilling the expectation of tight numbers, added weight for the last six months has helped to pressure futures due to extra inventory. On the flip side, prices moved to such a high level (nearly 30% above expected prices from earlier in the year), that demand has diminished as well. In the end, it's not a shocker that the hog market is trending downward at a window of time when slaughter numbers are on the decline and expectations are for tighter inventory. The point is, the market already factored this in well in advance.

It's not unusual for markets to be well ahead of the game. Traders like to buy uncertainty, but as facts become more known, they begin to move out of long positions and go short. The old saying, "Buy the rumor and sell the fact" seems to have merit with recent activity in the hog market.

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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