We will offer an analysis of the June Hog and Pig crop report that came out this past Thursday and what we believe it means to live hog futures going forward.
First, let’s look at what happened with the live hog and product market this past week.
Here is a summary of Pork Carcass cutout and live hog prices for week ending 6/23.
*Product Price on Monday 6/26 Price as of Friday 6/30 Change
Loin 93.64 94.63 .99
Butt 108.24 109.42 1.18
Picnic 67.94 67.90 (.04)
Rib 148.03 141.24 (6.79)
Ham 73.88 74.85 .97
Belly 190.31 198.17 7.86
Carcass Cutout $101.35 102.92 1.57
*National Carcass
Base Price $85.82 85.76 (.06)
*National Live Price $66.60 66.82 .22
**Estimated USDA Hog Slaughter Week ending 7/1/17 2192
Actual USDA Hog Slaughter Week ending 7/2/16 2185
% change year over year 100.3
As you can see, the carcass value gained $1.57 while the live hog price gained only $.22
Now, let’s look at the same time frame and compare what the first three live hog futures contracts did this past week.
Live Hog Contract Monday’s Close Friday Close Net Change for the week
July Hogs 87.73 90.63 2.90
August Hogs 80.53 83.75 3.22
October Hogs 69.28 70.45 1.17
Looking into next week:
- As you can see, the basis cash to futures narrowed as expected.This was what is supposed to happen as the July futures expiration draws close.
- The July futures gained 2.90 and the cash hogs only increased by .22cwt.
- Putting the product market values up against last week’s pig crop report, I think it is safe to say the product market is in the process of topping out.
- As we go through the Fourth of July week and the weeks to follow, the packer will be giving up margin as the sales of the product will slow down and prices will weaken.
- The live hogs may prove a little more resilient to downward price pressure, given that the hog producer is current and sold ahead. He will be able to decide which days to sell hogs and at what price he will sell. He is not in a ‘I have to sell hogs today’ mode.
- As mentioned last week, the packer margins are still unusually good for this time of year, and the packers will want to keep their slaughter schedules full because of that. The cutout may not be as good as previous weeks, but it is still in the black. Therefore, they can give up some margin and sell the product lower to keep inventories in check.
- Bellies may defy this scenario (at least temporarily) until the backlog of orders are filled and the food service demand cools down. We are getting very close, so watch the USDA composite belly market .
A word about the June Pig Crop report:
Here is the USDA report breakdown by category My Analysis
All Hogs 103% Within expectations
Kept for Breeding 102% Middle of the estimates
Kept for Marketing 104% This is indicative of how many hogs are coming this fall. (See the weight breakdowns below)
Weight Breakdowns: Estimated Slaughter dates
180 lbs. & over 106% 6/3-7/8 ( most of these are dead)
120-179 lbs. 104% 7/9-8/14
50-119 lbs. 104% 8/15- 10/13
Under 50 lbs. 104% 10/14- 12/10
As you can see, the weight breakdowns tell the tale. We have had a major expansion of the hog herd and it is now reflected by the weight breakdown of the hogs coming to market in the future. All of this will put downward pressure on the price of live hogs.
The June 29, 2017 pig crop is the largest on record since 1964.
How do we trade this?
- Stay with bull spreads long July and/or August hogs short October and/or December hogs. These front contracts are limited as to how far down they can go, given the proximity and the discount to the cash hog prices.
- Sell October and December hogs outright on rallies.
- Watch the weather and temperatures. If you get cooling temperatures, you could see a quick drop in the live price. By the same token, if you get extreme heat for an extended period of time, you can get a slow down in live hog marketings and a quick shift to higher prices, as packers fill out their weekly slaughter schedules.
- Product values become an even more critical factor in what packers will do regarding their slaughter schedules and what they will be willing to pay for hogs. If forward pork sales are good, the packer will be aggressive on pricing hogs if he needs them. The same holds true if they book some export orders. Be particularly watchful for export orders. The packer will be wanting to book overseas sales in order to get the surplus meat out of the country and buoy domestic prices.
*USDA National Hog and Pork summary
** Expressed in thousand head
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