December Lean Hog Futures Drop: Now What?
The decline in December lean hog futures on Tuesday may have come as a shock to some market participants, especially considering the bullish inventory numbers, Steiner Consulting said in the Daily Livestock Report.
“As of this writing, December lean hog futures are trading in the mid-70s, down about $13/cwt or 15% since September 20,” Steiner Consulting wrote on Wednesday morning. “There is plenty of guessing about the reasons for the decline, from a more bearish view about demand to risk off trades tied to the worsening economic outlook.”
What they don’t see mentioned much is that something similar played out last year as well, although timing and magnitude of the day-to-day moves was somewhat similar, Steiner Consulting wrote. Futures are greatly affected by spot market and participants don’t always recognize the seasonal effects at play.
“Just as last year there was a lot of optimism about pork prices in Q4 based on the price levels achieved in the summer only for that optimism to be replaced by a realization that prices tend to adjust quickly once kill numbers rise above a certain level,” Steiner Consulting wrote.
Since July, the pork cutout has traced a similar path as a year ago and market participants are now pricing a similar value with December pork cutout futures at around $87/hundredweight (cwt).
“The question at this time is whether there is anything different fundamentally this year to maybe result in a different price trajectory for pork prices and consequently Dec futures,” Steiner Consulting wrote.
Here’s what Steiner Consulting said is different this year.
1. Fewer hogs will be coming to market than a year ago.
The latest USDA ‘Hogs and Pigs’ report suggested slaughter should be around 1.5% lower than 2021 for the fourth quarter. Since the first week of September through the end of this week, slaughter will be about 1.7% lower than a year ago. Steiner Consulting said this is consistent with the inventory of hogs +180 pounds as of Sept. 1.
2. The average weight of producer-owned hogs is running below last year’s levels.
A year ago, the industry saw a sharp increase in average weights during October/November, suggesting producers lost ground in their marketings. Steiner Consulting said this resulted in a widening of the spread between cutout and hogs. A change in the trajectory of weights is yet to be seen and will be an important indicator going forward.
3. Belly prices were high in October 2021, negatively impacting sales in November and December.
Current prices are the lowest so far in 2022 and could incentivize higher sales for later in the year, Steiner Consulting wrote. Ham prices have outperformed expectations and could continue. Turkey prices are far higher this year as more cases of avian influenza will further limit turkey supply for the holidays. Mexico is also continuing to buy a lot of hams.
4. Consumers are trading down in protein choices.
Less expensive pork items, including pork trim, continue to hold up far better than a year ago, Steiner Consulting noted, suggesting the effect of consumers trading down in their protein choices.
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