Pork Central Hog Market Thoughts for December 1 2005

Al Prosch

There are only two years in the last 19, 1997 and 2004, when December futures were at this level going into December. Producers with a breakeven of $40 per cwt live weight value are able to lock in an average over $20 per hog for hogs produced in 2006. With little or no expansion evident, a strong export market and an additional processing facility being brought on line in early 2006, pork producers may see a third profitable year. Certainly, the opportunity to lock in profitable prices through futures hedges currently exists. The chart at left shows the lean hog futures for 2003, 2004, 2005 and the current level for 2006. The first half of 2006 is now very strong. In fact, note June 2006 is only exceeded by the 2004 prices. Later in 2006 a significant price decline is anticipated.

Most of the anticipated decline I would attribute to the uncertain demand side of the hog market. Domestic demand seems to be decreasing. In his November 14th report, Ron Plain, University of Missouri, indicated that “per capita pork consumption is down by 3.6%.”

While exports have been nothing short of phenomenal, an opening of the Japanese market to US beef products will add competition. It seems clear that it will take some time for the beef industry to regain a substantial share of this market. The Canadian boarder reopening was accompanied by suggestions that there would be a large influx of Canadian cattle. However, according to Steve Meyer and Len Steiner in the Daily Livestock Report, Canadian “exports of feeder and slaughter cattle appear to have peaked at around 27-30,000 head per week. Current levels are lower than in 2002 but at levels similar to 2000 and 2001.”

One poll quoted in Pork Profit Edge1 stated two-thirds of Japanese consumers will not buy US beef. However, given time marketing strategies like discounting, will likely provide more competition for the volume of pork moving to the export market.

During September, October and November, the cash market led the futures market while the October futures contract was the nearby comparison. Now that December is the nearby contract, futures show some strength over cash. Note that cash is rising and cash and futures could easily see a close in the $45 range in mid-December. The last two weeks of the December marketing will be affected by the holidays.

This is usually a volatile time both in cash sales and for market planning. If this time can be avoided, that may be a “good thing,” Deferred lean hog contracts are near or are setting new highs. This is a risk management “opportunity” for those who care to take it. Even December of 2006 offers a live price/cwt over or near $40.00 depending on basis.