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Analyst: The U.S. Hog Industry is OK

At yesterday's summer AgLeaders Conference session, we reiterated our long-term view on the hog and pork markets. As an industry, we are doing OK right now. For the year, our model is penciling out an $18 per had profit for producers assuming hog and feed prices get locked in today. That includes strong profits of just over $40 per head from June through August on down to a $0.06 loss for December marketed hogs. For 2018, a $12 per head profit can be locked in. Current breakevens are $61. That would rise to $64 factoring in the premiums in the back months.

One key point we made, which has to be discussed again, is that these futures prices made for the projections are artificially inflated. Since we are at the low supply time of year, these back month hog contracts are trading at likely their highest points you may see.

The USDA sees this week's kill at 2.239 million head. That was a little higher than we were expecting. As our charts show, we are now on the upward portion of the annual supply cycle. This week's kill would be the largest in 10 weeks. You will likely see some pressure start to show in those cash bids now. On the positive end, this week's kill was 2.1% over last year. That is a bit under the 4% higher that was implied by the June Hogs and Pigs report. It was also higher than the past four weeks that ran 3.4% over last year. We are not ready to revise down our Q3 or Q4 supply estimates based on this but it is positive news.

In the short term, we are wondering if the August contract is just too low. It expires and is cash settled to the Lean Hog Index on August 14. We are not buying it, but will monitor the situation closely.

On the speculative trade side, though we are bearish for December, the October may be only slightly overpriced. With a 7.45 swing of profitability from the chosen $67 strike price, we are simply collecting premium.

We are satisfied with the hedges on hogs out through February that use the December contract. As of the open of June 5, at the equivalent futures price of 63.07 using December hog options, these hedges should be in place. As of the July 3 open, we also have feed cost hedges using December corn options.

Rich Nelson | Allendale Inc. | 815-578-6161
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