Cash hog and wholesale pork prices continued rocketing higher last week. For example, the CME lean hog index, which futures cash-settle against, was officially quoted at 109.16 cents/pound Friday morning, thereby marking an all-time high.
Meanwhile, plant-based pork cutout values leapt 3.07 cents to 120.60 cents/pound Wednesday, smashing the 2013 peak at 109.98.
The latter quote probably fell below August 2012 highs (when hog prices formerly peaked), but the quotes aren’t directly comparable due to a January 2013 shift in pork reporting to the USDA.
Ongoing reductions in the supply of market-ready pigs is playing a huge role in the current price spike. For example, after falling about 6 percent under year-ago last week, hog slaughter is expected to drop about 7 percent this week, to about 2.025 million head, and in the next the next two weeks.
However, we still believe panicky buying by further processors and grocers is exacerbating the current situation. A look at weekly pork production illustrates this point.
That is, due to substantial increases in hog weights, we estimate this week’s pork output at 431 million pounds, which would be ‘only’ 5.4 percent below the comparable year-ago level. Conversely, that figure is 6.5 percent larger than the total posted during the week hog prices peaked in August 2011.
Again, vigorous pre-Labor Day domestic demand was being supplemented by a surge in Chinese buying at that time.
There can be little doubt that spring and summer 2014 hog slaughter is going to fall sharply below comparable historical levels due to the PEDV outbreak.
However, the sheer size of the current price spike will almost surely begin rationing demand in the very near future, especially if/when wholesale buyers reach a point where they’re more comfortable with their holdings. We probably can’t rule out a temporary rebound in market hog numbers in early spring, since the number of cases reported last fall didn’t really surge until November.
These are the reasons, we are suggesting a cautious start to third quarter hedges.