By Kent Bang
Volatility continues to be the biggest concern my clients have in efforts to navigate the market drivers and run a successful business. The vast majority have been in this industry for decades and are accustomed to highly volatile pig markets. However, recent trade negotiations and African swine fever (ASF) in China have resulted in some of the most difficult times to make marketing decisions as markets began reacting to significant reductions in the global pork supply.
Every commodity business has volatility as we all know. Products that can’t be put in storage makes pig production even more volatile with supply and demand changes that occur normally in our business. The storage time for live hogs is very short. You may be able to move pigs a few days from ideal market timing, but to move much more than that is difficult.
We do store pork in cold storage, but the available space is finite. History would say that we could store a couple more days of product, but cold storage for pork has been between 7 to 10 days of production for as long as records go back. We were at about eight days of production in cold storage at March month-end.
The futures market can help take some volatility off the table, or at least a portion of it. This industry (pig production) has become one of the leading commodities to use the futures and options markets over the past decade.
One of the reasons that we have more hesitation today is because of what we left on the table in 2014 with the run in market prices due to Porcine Epidemic Diarrhea Virus (PEDv) and the short supply of pigs in the U.S. We simply don’t want to miss the high-water mark in pig prices again.
I understand the sentiment but have tried to articulate how this is different than 2014. We are all aware that the losses of pigs, both breeding stock and market pigs, due to ASF has been extensive in China. No one knows how big these losses have been, but I think we can assume they are at least as large as the Chinese are reporting. In addition, this is not under control in China, or other parts of Southeast Asia as of now.
The losses continue and will be very hard to get under control with the lack of biosecurity they have in the majority of their production. This will likely be a long-term issue, reducing global pork supplies for several years to come, and maybe for the long-term for that part of the world.
Taking a market position at the right time, even if the top is missed, may be the right decision for many producers needing a strong profitable year. If wrong, and markets are missed in early 2020, I think the opportunity will be there for a longer period than what we saw with PEDv in 2014.
We have had opportunities in the futures market to lock in profits for a 12-month period that we have never seen before, and some are waiting for a target that may be difficult to get in the short-term.
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