It's Time to Hedge Hogs
Hog futures have been in a steady uptrend since late August, when February futures reached a low of $60.55.
February is now trading near $73.00, or a change in value of over 21%. Summer-month hog futures have experienced a strong recovery, as well as the June futures, rallying near 15%.
Rallies of this magnitude could be reflective of many things. One theory suggests prices were too low to begin with. Another theory is that low prices create stronger demand, and as prices move upward gaining momentum, speculative interest also develops. Whatever the case, the hog market has had a recovery. We wouldn’t be surprised to see the market exhibit topping signs soon. With a low input feed cost (corn prices are near contract lows) below the cost of production for many, we can expect herd expansion.
Strong export activity can, in part, be attributed to the recent rise in both cash and futures prices. Year-to-date exports through November are 8% higher than 2016. November shipments of fresh, frozen, and cooked pork were just over 535 million pounds and 5% higher than a year ago. This represents the largest month in export volume on record. Pork production in 2017 is estimated at 25.576 billion pounds, 635 million pounds higher than 2016. Production expectations for 2018 are to be near 26.9 billion pounds, or an increase of over 1.3 billion pounds.
Rising exports could help to absorb some of the forecasted increase in production, though exports alone will not be able to take up all of the expected increase in production. It is also unlikely that domestic demand will make up for the increase in production. This implies that the most recent recovery in hog futures should be viewed as an opportunity to defend. Shift risk through the use of put options, forward sales, or selling futures. A portfolio effect using all three may be warranted.
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Carol Tillmann Front Desk Administrative Assistant | Stewart-Peterson Office: 800.334.9779 | Fax: 262.334.6225 email@example.com
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