Friday, February 4th, 2011
$100 Lean Hogs futures. That was the big news item on Monday as June Lean Hogs crashed through the $100 barrier and set a new record high price ($101.00) and new record high close ($100.95). Those broke the previous records set July 3, 2008 when the June 2009 Lean Hogs.
The 2008 rally of the entire LH futures complex was driven by two factors: A rising cash market and, it appears more importantly, record-high cash grain and futures prices. The cash market was driven by burgeoning exports of U.S. pork to China/Hong Kong. Shipments of roughly 140 million pounds, carcass weight to that market in both May and June of 2008 are still the largest on record for U.S. pork exporters.
Cash hogs topped out for the summer in mid-August when Iowa-Minnesota hogs reached $86/cwt carcass on August 15. The reason we say the cash hog market was not as important as grain futures is that at the same time June 2009 Lean Hogs were reaching $100, up-front July 2008 Lean Hogs were trading at just under $72 on their way to an expiration 12 days later at $74.52. Iowa-Minnesota negotiated hogs sold for $73.56/cwt carcass at the expiration of June 2008 futures.
Futures traders saw the summer 2008 strength of pork and hog demand and record-high grain prices as a recipe for MUCH higher hog prices one year hence. That was a pretty logical conclusion at the time but it certainly did not play out that way. One year later, hog numbers were indeed lower but export disruptions and continued coverage of “swine flu” had battered hog markets back into the $50s and June 2009 Lean Hogs closed at $58.75, far below their peak of one year earlier.
So what are the drivers this year? Pork cutout values and hog prices have indeed rallied since their lows of last fall. The weekly average of USDA’s pork cutout value has risen from just under $75/cwt in late October to $87/cwt last week. Iowa-Minnesota negotiated hogs have rallied from just over $60/cwt in early November to $76.70/cwt last week.
The magnitude of those rallies is very close to the size of the price increases for every 2011 LH futures contract. “Cash is king” is more than a cliché. While corn and soybean meal prices are again approaching record highs, they will have little impact on hog numbers by this summer. They could have some negative impact on pork supplies as producers adjust market weights downward to avoid putting on those last few pounds which are far less cost efficient because the animals’ ability to convert feed to gain declines as they reach physiological maturity.
And, since slaughter weights have been so large since last fall, weights could certainly fall by a larger amount than is usual from winter highs to summer lows. Where in June 2008 we had little data from which to draw conclusions about hog supplies in June 2009, we have a reasonably good idea about hog supplies this summer. Our calculations, which for late May and early June are based on December Hogs and Pigs report estimates for Dec 1 inventories of under-50 lb. pigs, Dec-Feb farrowings and the most recent growth rate for litter size, indicate that supplies will be roughly even with those of 2008. And yet June futures, at just over $100/cwt, are now priced 25 to 30% higher than cash hog prices during the same period in 2010. Traders apparently believe that pork and hog demand will be much stronger this summer.
Such a belief is not completely unrealistic as the latest complete data we have (November 2010) indicated a surge of domestic pork demand. Whether that surge will continue through summer will be a key to whether cash hogs will match these lofty futures prices.
The Daily Livestock Report by Steve Meyer and Len Steiner