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CME: Market Participants Caught by Surprise

by 5m Editor
3 June 2009, at 8:27am

US - According to CME's Daily Livestock Report for 2 June 2009, the hog futures market seemed to collapse under the weight of unmet expectations as market participants apparently gave up on any hope of a summer rally and sent futures down the daily permissible limit.

All pork summer contracts, both lean hogs and bellies, closed limit down (300 points) on Tuesday afternoon. June through October lean hog carcass futures established life of contract lows. 2009 pork belly futures also are now at life of contract lows. The sharp retraction seemed to catch some market participants by surprise, especially as there was not a major news outbreak prompting the widespread selling. Rather, it seems that market participants were spooked by the surge in grain futures and the potential short term impact that this will have on hog producers. At this time, it seems to us that producers are running behind in their marketings, as evidenced by lean hog carcass weights that are some 3 pounds or 1.5 per cent above a year ago.

At an average of 204 pounds per dressed carcass, weights are at a new all time record level for this time of year. With producers running behind and feed costs escalating, market participants likely concluded that there will be a rush to sell animals in a market that clearly is having demand problems. Slaughter levels may still be below year ago levels but that does not mean much when higher carcass weights have offset much of that decline in slaughter and production levels are significantly above what they were in 2006 and 2007. For the week ending 30 May hog slaughter was down 1.2 per cent from a year ago but pork production was up 0.3 per cent.

It is also suspected that exports to Mexico have slowed down considerably and this has negatively impacted the market. In the first quarter, Mexico was one of the main growth markets for US pork and helped offset some of the expected declines in shipments to Russia and China. Now it appears that is no longer the case. Ham values have been hit especially hard, Mexico is a significant market for US hams, and they are currently some 40 per cent lower than a year ago. Finally, there is all the talk of a sow herd retirement program and the impact that such a liquidation could have on pork supplies short term. In all, another terrible day for pork producers, especially when considering all the bullish talk about corn prices for next year.