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What the quarterly hogs and pigs report did not say

Most figures from the quarterly Hogs and Pigs report, released on September 23, were about as indicated. More importantly is what the report didn't say, and that's significant expansion. After bottoming in August of last year, hog prices have been in a steady uptrend, with nearby futures peaking in May. Deferred contracts have continued to push into new contract highs, anticipating that higher grain prices the second half of this summer will curb any significant or serious expansion. The Hogs and Pigs report seems to confirm this.

The breakdowns are as follows: All hogs and pigs came in at 97.4% of a year ago. Kept for breeding came in at 98.2%, and marketings at 97.3%. The only number slightly above expectations is the December through February farrowing intentions, which came in at 100.5%. What the industry appears to be experiencing is a growing demand market, yet at the same time rising inputs and tight capital have limited expansionary plans.

Will that continue? With corn prices trading near $5 in futures on front months and well over $5 on deferred months, we just don't see the incentive for hog producers to expand their operations at this time. On a positive note, pork exports have been on the rise over the last year. More importantly, the market suffered through a period of negative news such as Swine Flu, as did economic concerns throughout the world in 2008 and 2009. Now that world economies appear to be on the mend and the need for protein products continues to grow, so does the need for more pigs. Yet the report reflected a lack of expansion.

So what would create a more expansionary environment? Obviously, cheaper inputs. The corn market would probably need to drop back to $4 or less and hog prices hold at current levels, which currently indicate lean hog futures trading in the upper $70s to mid $80s. Or, another $10 to $15 jump in lean hog prices. We don't think either is very likely at this time. Corn prices could set back at some point; however, will it be enough to act as a catalyst for expansion? Expect tight hog inventories into next year. Production per litter continues to improve, although this can only improve at a relatively slow pace. If demand can pick up from current levels, hog prices will hold or improve through 2011.

If you have comments, questions or suggestions, contact Bryan Doherty at 1-800-Top-Farm, Ext. 129.

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.

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