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Jim Long Pork Commentary: Market freefall

8 April 2020, at 8:00am

Lean Hog futures continued to be the pox on our house, creating fear and financial calamity in the swine sector. April Lean Hogs were 66.42¢ on March 24, on Friday, April 3, they closed at 40.22¢. A $50 per head drop in 10 days.

We aren’t lean hog future historians but we would guess this is the largest drop in lean hog future history. The National Daily Base Carcass slaughter 53-54 percent has decreased from 65.62¢ to 59.59¢ (March 26 – April 2).

Part of the fear of driving the market lower is the thought pork (meat) consumption will decrease due to Coronavirus and slaughter plants will be closed or slowed down. We thought it would be a good idea to look at what’s happening in Europe (Spain) re Coronavirus, slaughter plants and pork prices.

Spain - 3rd largest hog producing country in the world.

Coronavirus deaths in Spain as of Saturday - 251 per 1 million people, in the USA deaths were 22 per 1 million people.

This is a report at the end of last week from Mercolleida, a coalition of Spanish producers, packers, and processors (translated from Spanish).

  • Packing plants are working well, there are some little problems with personnel.
  • So far pork prices have not plummeted.
  • Internal demand for pork is down but export demand is stronger.
  • One of the safest places in this country seems to be inside a slaughterhouse, whose strict biosecurity measures have now been joined by those specific to Coronavirus.
  • Spanish integrators are not nervous about the market situation, because it appears no one cancels trucks and they have constant demand.

Price of Pigs in Spain

  • The historic high was March 5 at 1.54 Euro/Kg. (75.6₵ lb. US liveweight).
  • Last week on Thursday, April 2 - 1.48 Eur/Kg. (72.65₵ lb. US liveweight).

Not much of a drop. No doubt so far Spain has significantly more problems with Coronavirus than the US, with a death rate 10 times US per 1 million people.

So far plants remain open, with good demand for export and with internal pork price stable.

We hope the US can stabilize prices. We expect US consumers will continue eating pork and exports will stay strong.

One other thing Spain doesn’t have lean hog futures to destabilize their market. As my late friend Doug Maus called Chicago “Las Vegas with no rules”. We can only imagine the devastating margin calls the last ten days on many. It’s one thing to lose value in the stock market, but at least you don’t have to cover the decrease with cash immediately.

The lean hog future value collapse we expect was driven by sharpies on Wall Street running computer models and the reality of margin calls eliminating contract holders.

If futures are a true reflection of the market coming i.e. August 54₵ there’s no way May next year will be 64₵. The liquidation of the sow herd by the spring of next year would be unprecedented.

Sow Herd

Last Quarter (Dec 1 to Mar 1) showed a 96,000 sow head decline. The latest sow kill week was 66,500 – last year averaged 57,500 per week. We expect the scenario we are in now will see from March 1 to June 1, a decline of 150,000 – 250, 000 sows.

Someone asked us last week how is the market going to sort? Our reply was, its happening; the sow herd liquidation that is happening will fix any packer capacity issues real soon if we are half-ass correct.

A 6-month decline of 250,000 – 350,000 sows cuts annual production capacity by 5-7 million hogs. Do you think any new financing for sow barns from bankers is going to happen in the next 6 months?

Summary

  • Sow herd liquidation that began in December will continue but at a faster pace.
  • We expect consumer pork demand to stabilize and exports continue at record area levels.
  • Packing plants and all food processing will be challenged by Coronavirus, but whether it’s Walmart distribution centers, pork, chicken, beef, plants, milk or any food processing, society cannot afford the collapse of the food chain due to Coronavirus positives.
  • China made sure during coronavirus food kept coming, we expect the US will too. There is little choice.