USDA's Quarterly Hogs and Pigs Report was somewhat of a non-event for the third straight quarter. Not that a non-event is a bad thing. After more than two years of very good profits, the risk on these reports is definitely to the upside. I'll never forget the sinking feeling I had in June 1998 when the numbers were huge and one could see headlights of the train coming.

Woody Hayes was right -- boring victories are far more valuable than exciting defeats.

The numbers in this report (shown in Figure 1) were very close to the average of analysts' pre-report estimates as published earlier last week by DowJones. In addition, the over 180-lb. inventory matched very well with June slaughter and the under 60-lb. inventory fit reasonably well with the March-May pig crop.

The only numbers that were a bit surprising were the market inventory numbers, which were all lower than expected, but none was more than 0.9% lower. It's no surprise that Chicago Mercantile Exchange (CME) Lean Hogs futures prices responded with a yawn, especially after the strength they had shown in the weeks just prior to the report.

The immediate risk is that the high has been made in the cash market and I place a pretty high probability -- 80% or so -- that it, indeed, has. The weekly averages for the national weighted average base (shown in Figure 2) and net prices both went above the 2004 price level the week before last and, in spite of slaughter nearly 2% smaller than one year ago, these prices fell last week.

Registering the 'Highs'

Looking at historical Iowa data, it has been a very good bet in recent years that the high of the hog market would be made by July 1. The only year since 2000 that this has not been the case was 2004 when extraordinary demand, a hog squeeze and, at least according to some observers, some effective manipulation of prices caused the year's high to be reached in the first week of December.

In 2000, 2001 and 2003, the high was reached in the third week of June, and in 2002, it hit the last week of June. Last year the high was set in May, before the belly price debacle drove cutout values lower in the summer. There was no speculative buildup of belly stocks this year, so I would say it is more analogous to the 2000-2004 pattern, which supports my contention that the highs are in.

Interestingly, late June was not such a sure a bet prior to 2000. From 1973 through 1999, there were seven years in which the annual high occurred in July and seven years in which it occurred in August. The next most frequent months for annual highs were June and February with three. June is understandable, but I would never have bet on February as its companion in the ranking.

What does it Mean?

"Cash is King" is the old saying -- and usually it holds true. A very strong cash market and the June Hogs & Pigs report have driven the summer rally in CME Lean Hog futures, confirming that supply fundamentals haven't changed much. It is true that demand feels much better at present, but the hard data to confirm or refute that won't be available until August.

When you live by the sword you face great risk of dying by it, so don't let this opportunity slip away as cash prices begin to slide into fall. I don't foresee any kind of disaster this fall, barring a huge negative shock like an export disruption or human-to-human transfer of bird flu. I do think the fall contracts are at least fairly priced relative to my expectations, and contracts for the first half of 2007 are above my price forecasts.

See Figure 3 for a compilation of four market analysts' price forecasts based on the June report. Note that Professors Grimes and Plain are significantly less optimistic about prices than are the other three, largely because they have factored in lower hog demand, while the others have left hog demand steady.