Derrell Peel of Oklahoma State University and Ronald Plain of the University of Missouri served as reviewers.
If a pig producer is unfamiliar with futures markets and hedging, he or she may have a lot of questions about how to use this pricing instrument. But the most fundamental question is why would you want to learn about futures markets? To put it another way, why do manufacturers hedge? To respond to this question, you must first define futures markets and hedging. A hog futures market determines the price of hogs that will not be delivered until a later date. Hedging is when a producer utilizes the futures market to forward-price pigs before delivery. Forward-pricing pigs is done for two reasons. For starters, the producer might believe that current futures market prices are greater than cash prices when the hogs are ready to be delivered. Second, even if cash prices are greater at delivery time, a manufacturer may be unable or unwilling to take the risks of prices lower than the present futures price.
Why are the prices of hog futures so high?
Despite a recent drop in grain prices, corn and soybean prices remain at levels not seen in years.
As a result, animal farmers, notably pork producers, are faced with difficult decisions.
The numbers appear to be promising. According to the current Sterling Profit Tracker, farrow to finish farmers are expecting average profits of $94 per head. While it is still in the positive, it has dropped from last week’s $107 in potential profits. However, the current Profit Tracker is an improvement over the minus $51 per head that producers were experiencing at this time last year, when processing capacity was experiencing substantial constraints.
“Obviously, grain costs are increasing as well,” Amanda Adam, a pork producer in Washington County, Iowa, says. “As a result, the margins are still different than if grain prices were back in the $3 or $4 level.”
How do you go about purchasing a hog future?
CME offers lean hog futures contracts on the Globex trading platform, which can be traded electronically through Schwab. Trading lean hog futures requires a futures account that has been approved.
Why is the price of hogs so high?
In January, I predicted that hog futures were on the verge of a meteoric rise. I had to confess in early February that the rocket had not yet taken off. However, by early March, it was clear that the rocket had departed the launch pad. Only one question remained: how much gasoline was left in the boosters? We now know that the fuel boosters were completely filled.
Lean hog futures outperformed all other markets, including global stock indexes, bond ETFs, currencies, and all other commodities, according to the Wall Street Journal on April 1. Lean hogs came in first, with a return of 43.79 percent in the first quarter. A welcome development in the aftermath of the devastating 2020, as well as the losses experienced for several years prior to 2020. The question now is how long the hogs will stay in orbit.
Here’s what I view through my telescope as I follow the hog market. I envision a market that has eclipsed its 2019 highs and is slicing through these levels like butter through a hot knife. The April hog contract reached a high of $82.00/cwt in 2019. Hog contracts for April 2021 settled at $101.70/cwt on Friday. The high for June pigs in 2019 was $100.00/cwt. June 2021 futures settled at $106.80/cwt on Friday.
In less than two weeks, the April hog contract will expire. In terms of summer hogs, the highs set in the PEDV year of 2014 may probably be challenged this year. In all three summer contracts, these levels are $133.00-$134.00. In 2014, October hogs reached a high of $116.00 on July 3rd, with December hogs reaching a high of $105.80 in early July. Some analysts I spoke with anticipate summer hog futures will trade at $140.00.
The autumn and winter 2022 hog contracts, in my opinion, are the most undervalued at the present. We’re actively purchasing December calls and constructing bull call spreads as we exit bullish positions in the April hog contracts, unwinding both long futures and long calls. These are locations that cannot be margined. We’re unprotected. As the price of summer pigs approaches $120.00, I want to become quite active in hedging. At this point, we’ll be purchasing puts, potentially buying puts and selling calls, and considering selling some carcass contracts for our hedge clients for the first time.
The fundamental landscape is bullish to very positive in my opinion. It’s almost like a picture-perfect storm. Butcher hog supplies this spring are well below estimates, as a result of what happened last spring, when vast numbers of hogs were backed up as COVID struck. A large number of sows who were farrowed, or were meant to be farrowed, had their babies aborted or euthanized. Producers were frantically trying to stay afloat throughout the crisis. The USDA never picked up these statistics, or lost numbers, and never measured and quantified them. They didn’t even bother to attempt. It was decided to simply let the market work it out, which is currently taking place. Most observers expected the kept-for-market hog category to be exactly the same as last year. Instead, the figures have dropped from 5% to as much as 8%.
As a result, the scenario from ten and eleven months ago is having an effect on the current supply of butchers. Early next year, the existing situation will have an influence on the supply of butchers. Since last fall, PRRS and PEDV have been causing major complications. Feed prices began to rise at the same period. The decision to leave the company was made. Sows were slaughtered in large numbers.
The available quantity of trimmings is particularly limited today due to a lack of pork and a continuing manpower shortfall at packaging factories. In order to procure product and meet demand, sow mills are bidding extraordinarily high rates for heavy sows because to record high trim prices.
Despite the recovery of profitability, sow liquidation persists. Producers can get incredibly high prices for their sow herds while still having hogs ready to sell in a short period of time. This is why I think hogs in October, December, and February are undervalued.
The fact that none of the pigs are being fed the feed additive Paylean is the final positive development on the horizon. As summer approaches, hog weights will plummet, exacerbating the pork supply scarcity.
Perhaps even more attractive than the supply side of the ledger is the demand side. According to the employment report released on April 2, 916,000 jobs were generated in March, significantly more than predicted. The leisure and hospitality industry grew the most, adding 280,000 new employment. 176,000 additional employment were created in bars and restaurants. This is a leading indicator of the impending release of pent-up desire, as I call it.
This rush will result in a significant increase in meat consumption, notably pork. The normal seasonal demand has begun, and food service restocking has begun in earnest. Remember, the foodservice business has never been shut down as completely as it has been in the last 12 months. The increase in demand is unfathomable.
Finally, but certainly not least, China’s massive pork export demand. It’s becoming increasingly evident that China has recently experienced a terrible second wave of African Swine Fever, which has decimated the country’s sow herd. Pork exports are expected to see robust demand and growth in 2021.
Pork export sales are at an all-time high, at 383,284 MT, for this time of year. Outstanding sales to Mexico account for 31% of all outstanding sales, while sales to China/Hong Kong account for 26% of all outstanding sales. In the upcoming meat supply/demand table, which will be revealed on Friday, April 9, I believe the USDA will be obliged to revise upward their export projections for this year. In the face of decreasing butcher hog numbers and lower production, increased export trade will ensue. The effect will be increased to dramatically higher pricing.
Finally, the hogs will be in orbit for an extended period of time. This ride will endure far longer than the summer. Hog prices are expected to stay good to very strong throughout the rest of 2021 and most of 2022, according to my forecast. Even in the face of zero profitability, the sector has been aggressively expanding for years, as producers were persuaded to win market share as slaughter capacity rose. Until the emergence of African Swine Fever in China in late 2018, the industry was on its way to a dark and profound bottom. Despite the fact that profitability is on the horizon, the industry is currently in a contraction mode, which may last for the rest of the summer.
There is only one major danger to be aware of: the remote but very possible chance of an ASF scare in the United States.
Source: Dennis Smith, who is solely responsible for and exclusive owner of the information given. Any content contained in this information asset is not the responsibility of Informa Business Media or any of its subsidiaries. This writer’s views may not always reflect those of Farm Progress/Informa.
Do pork bellies have a market value?
Pork bellies were previously a commodity that was traded on exchanges, with farmers selling them and resellers, speculators, and food companies buying them to use in products.
What influences the price of lean hogs?
The vast global pork industry is intimately tied to the usage of lean animals to speculate on pork prices. Pork is consumed by more people throughout the world than any other animal protein.
Pork consumption reaches 100 million metric tons per year worldwide, spanning varied geographies, economics, and cultures.
Lean hog prices have typically been linked to livestock feed prices and weather patterns. Price fluctuations are also influenced by increased demand from China and competition from other animal products.
What is the value of a 250-pound pig?
The WHVC not only shows the total weight and value of wholesale cuts for a group, but it also shows the pounds and values of individual wholesale cuts (Table 4). The total wholesale weight of the 250-pound hogs yielding more than 75 percent is 31,861 pounds, priced at $26,582 or $132.91 per head.
How much do hogs on the hoof cost?
In September, the average live price for 51-52 percent lean pigs was $68.84/cwt, down for the third month in a row. Prices were $9.75 lower than the previous month, but $20.43 higher than September 2020. In 2020, the 51-52 percent lean live hog price averaged $43.18/cwt, according to the USDA. This year’s average price is expected to be around $69.45/cwt, with a 2022 average of roughly $61.00/cwt.
Will prices remain higher than they were a year ago in fall? There are a number of reasons to believe that they will.
First and foremost, considering that weekly hog slaughter has consistently been below the year-ago level since the end of May, the speed with which this year’s hog price decrease has occurred is remarkable.
The USDA’s September report “According to the “Hogs and Pigs” report, inventory of market hogs weighing 180 pounds or more was down 1.3 percent, while inventory of hogs from 120 to 179 pounds was down 1.42 percent. This meant that hog killing should have decreased by 1.35 percent since September 1. It has actually dropped 2.84 percent. We either missed the slaughter deadline or USDA underestimated the heavy-weight market hog inventory. My guess is that it’s the latter.
According to USDA, the inventory of 50-119 pounders was down 6.04 percent on September 1, and the inventory of under 50 pounders was down 5.57 percent. This means November slaughter will be 2.34 percent lower, December 6.04 percent lower, and January-February slaughter will be 5.57 percent lower. If winter hog slaughter is so low, hog prices should see a significant increase.
Pork is a commodity that consumers are ready to pay a premium for. For the sixth month in a row, retail pork prices hit new highs in September. In September, the average price of a pound of pork in grocery stores was $4.716. This was 6.6 cents higher than August and 66.3 cents higher than September 2020. These all-time high pork prices are a little deceiving. Although September retail pork prices were 16.4 percent higher than last year, the nominal September price was just 10.4 percent higher due to higher inflation. According to preliminary data, per capita pork supply was reduced in September, implying a higher pork price.
On the downside, following the September market, some lean hog futures contracts were limit up “Hogs and Pigs” report, but have since relinquished all of their gains. Before the report was released, the December 2021 contract closed at $76.80/cwt. During the next two trading sessions, that contract earned $6.775. December hogs ended at $73.32/cwt. on Friday, $3.48 lower than the pre-release price.
The February hog market settled at $76.625/cwt on Friday. Contracts for the months of June, July, and August 2022 all closed above $89.00/cwt. The December 2022 contract finished at $70.25 per cwt, $3.07 lower than the closest contract. The futures prices suggest that in 2022, prices will follow an usual seasonal trend, with a lower average than this year.
Retail pork demand was strong from January through April, but has since slowed. The demand for pork from the United States has been strong all year.
Pork exports in the United States were down 0.2 percent in August compared to the same month previous year, while pork imports were up 22.0 percent. Exports accounted for 26.7 percent of total pork production from January to August, while imports accounted for 3.9 percent. Variety meats are not included.
Pork from numerous nations, including Canada, Mexico, Italy, and Hungary, has increased imports to the United States. Exports have remained stable, with more pork going to Mexico, the Philippines, Japan, and Colombia than to China.