Hog prices could be peaking, analyst says
Hog futures have roared to life as front month October rallied from near $48 in early August to $75 in early October.
This $27 rally is significant and reflective of many things. Mostly, the expectation that supply needs in China are paramount and the export market has remained very active.
Yet, we believe there’s a little more to the story.
When coronavirus hit full force in late winter and spring, the result was a major crash in hog prices. Not only were logistics of shipping U.S. meat overseas a major question; importing countries were facing logistic problems to import pork (in particular, China), where ports were shut down. Adding to the issue were positive cases of COVID-19 in U.S. packing plants, many of which were shut down, creating a significant backlog of heavyweight hogs. It was a moment in time where everyone was scrambling in a different direction with no easy answers. What ensured was an environment for the eventual recovery in hog prices.
Producers took management practices to a new level, reducing supply through various means. It wasn’t pretty or desired, yet euthanization was one course of action. Once prices found their low and began moving upward, momentum slowly built as prices continued to firm. An expected shortfall of supply by early fall set the stage for price recovery. Prices then moved dramatically higher as export sales picked up and reports of a shortfall of pork availability in China was noted.
However, the most recent Hogs and Pigs report indicated there is ample near-term inventory expected for the second half of the fourth quarter. The current rally may be short-lived.
October hog futures soared higher, yet deferred months didn’t follow as quickly. Now that fall is here, and it appears there is an ample supply of corn and soybeans, the hog herd will be on the increase.
Ultimately, this could put pressure on prices.
While we expect export activity with China to remain strong, we also acknowledge that its internal supplies appear to be growing at a faster pace than first anticipated.
The bottom line: Producers need to be vigilant and offensive-minded. The best approach for this may be either forward contracting and purchasing a call to retain ownership or purchasing a put to establish a price floor and leaving your inventory unpriced.
The key is good management and a balanced approach.
From a marketing perspective, ensure you’re analyzing all tools that may have impact. Have a serious discussion with your adviser now, exploring your risk strategies and implementing them. Don’t wait for prices to fall to take a more serious approach to managing your risk and opportunities.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-TOP-FARM, extension 444.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.