Wean Pig Profitability: What Will Happen This Summer?

Many people in the industry are skeptical that hog prices this summer will line up as forecasted by the summer futures prices. The June lean hog futures have drifted down from highs of around $110 to below $100 and are now racing up again and have closed recently at around $105. These prices will be highly volatile through the early spring due to several factors.  

There are strong indications the Federal Reserve System (FED) will continue to push interest rates higher until the job market lays off enough people to re-establish the proper relationship between goods available and money to purchase them. The primary impacts of this activity by the FED will continue to create high food and energy prices and shave capacity to spend out of the economy through slowing down business activity and laying off workers.  

At the present time, after many months of interest rate increases, the economy is at full employment and strong purchasing is continuing. However, there are signs that much of the current spending is being supported by credit card debt which delays the reduction in prices and slows the eventual recovery when the balance of consumption spending and debt repayment reduces net spending. 

What Does This Mean for Pork Markets?

The perception of a strong position by the FED, which is seen as returning the U.S. economy back to low inflation, will tend to keep the value of the dollar strong which may dampen exports and encourage the importation of pork, especially from Canada. Since every phase of the pork chain is a heavy user of energy, this means costs of production will remain above normal, even as costs of feed grains begin normalizing to previous patterns. 

Since June lean hog futures prices represent some of the highest prices in a typical year, the current weaned pig prices will usually have their annual high in late January/early February since these are the pigs that will eventually be sold into those high summer prices. The willingness to pay for feeder pigs is directly related to expected profits, so we are likely to see those prices also somewhat volatile especially in late winter/early spring. 

Some of that volatility will be dampened in the weaned pig market since those buying on the cash market need to fill their buildings now in order to have a chance at the annual high hog price of the summer, so they will move the market to get that done. Discretionary buyers may hold back for a while if they believe the current summer forecasts in the futures.

The Price of Stability

One of the interesting things we can see in the relationship between the current weaned pig price and the current futures price for lean hogs sold six to seven months out, is the balance that producers buying piglets must consider. While demand for weaners is high in January, the tendency has been to reduce subsequent profitability for those pigs by bidding the January weaned pig price up too aggressively. We can see over time the spikes in weaned pig prices near the beginning of the year are associated with some of the subsequently lowest net income outcomes later during the summer.  

Of course, other factors contributed to these outcomes during the COVID-19 disasters and plant closures. Prices for weaned pigs on the open market tend to exceed those determined by formula or contract at this time of year since formula prices are estimated with the use of formulas often specifically designed to lower monthly volatility. 

When volatility is lowered, the average annual price for the pigs would be expected to be higher, and just be less volatile. You must pay for that stability. Cash weaned pig prices in January often are 1.5 or more times the cost of production for the same pig. That is a final profit haircut right at the outset, so maintaining the best possible efficiency and low disease status is critical to changing those high summer prices into strong summer profits.

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