A Visit to the Hog Market
Did you notice the rally that the hog complex experienced during the month of June? Live hog prices surged 18% year-to-date and about 40% since bottoming out in late March.
The rally came thanks both to a free-falling metals complex (funds moving their money – taking profits in metals and sinking their fortune into “cheap” hogs instead) and the Smithfield Foods deal. China’s Shuanghui International’s pending $4.7 billion deal to take over Smithfield Foods is also helping to elevate hog futures. Although some in Congress said they have regulatory issues, hog prices rose after the May 29 announcement of the deal.
The recent rally in hogs pushed the market value to $12 billion, excluding options, matching silver and surpassing the cattle market for the first time ever.
However, the rally is easing as profit taking is in and from pressure due to declining wholesale pork prices and the possibility that lower corn prices could lead to larger hog supplies longer-term. A drop of nearly 4% in wholesale pork prices over the past week is weighing on market sentiment, as traders worry about a post-holiday drop-off in consumer meat demand.
But at the same time, worries about a virus that is affecting piglets in several U.S. states point to diminished supplies. The porcine epidemic diarrhea virus can result in high mortality rates in young pigs. Older pigs can also get the virus but normally recover. The virus, which affects live hogs but is not considered a threat to the food supply, has been identified in at least 15 states.
In spite of the epidemic, third-quarter pork production is expected to increase by 170 million pounds from the second quarter, which is the second largest increase in 16 years. This could provide more seasonal pressure than normal later this summer.
It’s obvious there are still a lot of scenarios yet to unfold in the months ahead for the hog market. Overall, we at Stewart-Peterson feel hogs have good value. Although a technical setback or market correction might be justified, the big picture in hogs still looks positive. For your marketing, the important thing to remember is what advisers at Stewart-Peterson call “market scenario planning.” Through this process the different scenarios are considered, allowing you to prepare risk-management strategies for multiple-price scenarios and help determine which strategies will yield the best price using an assortment of risk-management tools.