U.S. hog prices have been sagging over the past nine weeks for a number of reasons. Among them are record herd productivity, heavier slaughter weights and softer domestic demand which are all weighing on hog prices. On Wednesday, the May lean hog futures contract was off slightly at $79.750 with the June contract at $84.550.
While the number of sows farrowed in the U.S. has been declining since 2007, the number of pigs per litter has been on the rise for each quarter since 2003. In addition, pork production in China and South Korea, important export markets for U.S. pork, is expected to be up 4 percent and 17 percent respectively, in 2012. The USDA’s Foreign Agricultural Service (FAS) predicts that 2012 world pork production will increase by 2.7 percent over 2011 levels, according to Ron Plain, University of Missouri agricultural economist.
“I’m not real optimistic on the hog market at this point,” says Joe Kerns, president, Kerns and Associates, Ames, Iowa. “We still have a good supply of hogs for slaughter at relatively heavier carcass weights and we need to back off on hog supply somewhat in order to firm up pricing.”
Kerns also believes U.S. pork exports to China are not as robust as witnessed in 2011. Pork prices in China have moved lower 14 weeks in a row and the Chinese government is stockpiling domestic pork, Kerns says.
The current weakness in hog prices may be stinging producers more this year because fewer hog are hedged. At this time in 2011 we had nearly double the number of hogs hedged as we have this year, Kerns says. “With progressively stronger hog prices throughout the summer last year however, some producers lost an opportunity for higher margins due to their hedging. This year it’s just the opposite with less hedging being used as hog prices have faded.”
The front-end May and June hog futures contracts have come under more pressure than the back-end contracts. “The front-end contracts have taken the brunt of the pressure and the back-end to a much lesser degree.” Kerns expects the June contract will receive substantial volume.
Meanwhile, on the input side, producers may get a break on corn prices. May corn moved markedly lower Wednesday closing at $6.41 per bushel ahead of the monthly USDA crop report expected Thursday.”On average, corn ending stocks for 2012/2013 are expected to be 1.714 billion bushels, compared to an average of 749 million bushels in 2011/12,” according to a CME Group report.
Current supply estimates indicate that corn could trade below $5 per bushel next year, according to the CME report, but futures will continue to price in summer weather risk, at least until early August. So far, however, pork producers can look forward to a much improved corn outlook.