The CME lean hog index, which futures cash-settle against, peaked at an all-time high of 134.17 cents/pound on July 16, but has fallen sharply in recent weeks. It was officially stated at 123.37 Thursday, which represents a drop of 10.80 cents/pound in just three weeks. Is the drop overdone? Does it hold implications for the fourth-quarter outlook?
Recent hog price action doesn’t fit historical patterns, since those imply the market tends to peak in May or June, then sometimes surges to a fresh high in August. In fact, one has to look back to 1987 to find the last mid-July cash peak. An August rebound to fresh highs seems very unlikely at this point.
We aren’t particularly optimistic and harbor suspicions that the fourth-quarter CME contracts are overpriced. However, the current breakdown seems quite similar to the late-summer breakdowns experienced in 2002 and 2012. Cash quotes actually hit their late-year low in early-mid-September of those years. That also seems improbable this year, but those precedents do suggest the usual late-summer rebound could prove quite substantial.
As usual, much depends upon the size of forthcoming hog and pork production. We still think slaughter will fall short of former industry expectations during the coming weeks. Late-summer pork demand is probably the wild card in the deck.
We think it will improve seasonally in late August. However, given our suspicions that the June-July price surge reflected early buying for the second half of summer, we doubt the anticipated resurgence will live up to bullish hopes. On the other hand, such a move could enable producers to establish or add to fall and winter hedges.
Editor’s Note: Dan Vaught is a livestock economist for Doane Advisory Services, St. Louis, Mo. Doane distributes a number of timely, relevant newsletters to farmers that contain expert commentaries and market advice. For more information, call 314.569.2700 or go to: www.Doane.com.