Lean Hog Futures Spread Widens

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The spread in December 2009 and June 2010 lean hog futures is currently in the neighborhood of $22 in favor of the June contract which represents an unusually high, perhaps record level. Is it a sign that investors are predicting a turnaround for the pork industry between now and then?

“The $22 spread right now is substantially wider than the average for August,” says Darrell Mark, Extension livestock marketing specialist, University of Nebraska-Lincoln. “Over the last 5 years, the December/June spread has averaged in the $7 to $8 range, and in the last 15 years, the spread has been in the $8 to $9 range during August.”

Mark believes there are a number of factors that could be contributing. “First, December is being discounted because of the high productivity levels and a relatively slow pace of sow liquidation that has occurred relative to what the industry perceives as being needed,” he explains. “Additionally, December is pressured by the continuous talk and media emphasis of (Type A) H1N1 this next winter and the importance of getting people vaccinated. Further, I believe the winter months are hurt by weak overall demand.”

The economist believes the recession also plays an important role in contributing to the wider-than-normal spread. “The economy hasn't started growing much yet, and it will be a slow, slow growth period from this recession the way it is appearing,” Mark warns. “As a result, pork demand will continue to be challenged through the end of this year.”

However, Mark sees a glimmer of hope for increased demand which also may be a reason for the higher June ’10 futures level. “There is the expectation for demand to improve, both from forecasted higher exports in 2010 relative to 2009, and from an improvement in the economy which would bolster domestic demand,” he adds. “The premium of June (over December) also shows the sow liquidation that is expected due to the financial crisis the industry currently faces which may lead to lower animal numbers by next summer.”



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