Doane Strategy Update: We still hold short futures positions protecting 50% of expected third second-quarter sales and 15% of anticipated fourth-quarter production. We now suggest boosting third-quarter hedges 10% by selling August futures over 129.00 cents/pound and pushing fourth-quarter coverage up another 15% if/when October futures reach 109.00 cents/pound prior to June 27 USDA Hogs & Pigs report. We would add an additional 20% if the contract reaches 112.00.
The August 2014 through June 2015 CME lean hog contracts surged to fresh highs last week, with traders obviously thinking cash markets would prove extremely strong during summer and remain greatly elevated for the foreseeable future. However, Chicago prices turned sharply lower this week despite consistent cash hog and wholesale pork strength. One has to wonder if early estimates for Friday's USDA Hogs & Pigs report are being construed as bearish.
Doane forecasts don’t seem very friendly. For example, we’ve estimated the June 1 U.S. hog population at 62.55 million head, which represents a 4% annual reduction. The market hog total seems likely to suffer a similar reduction to 56.625 million. However, sow slaughter during the winter and spring quarters fell below 700,000 head for the first time since spring 1976, thereby implying considerable industry impetus for breeding herd expansion. Thus, our forecast of a 1% annual increase might be rather conservative.
Major questions surround the size of the spring pig crop and likely hog supplies later this year. PEDV cases reported during spring actually exceeded the winter total, since the decline from the February peak was slower than the surge seen during winter. Thus, we expect a 6% annual reduction in pigs saved per litter, but that still leaves the spring average, at 9.65 pigs slightly above the winter result.
In contrast, March-May 2013 sow farrowings were extraordinarily low, coming in 5% below the 2012 figure despite the fact that March 1, 2013 breeding herd figure had actually increased by 16,000 annually. Given the strong winter farrowings figure and the recent price spike, we think spring 2014 farrowings jumped 5% over the year-ago level. The net result of these shifts would be just a 2% reduction in the spring pig crop. Overall, we think the report will tend to have a bearish bias.