Sharply lower U.S. hog slaughter over the last two weeks has helped spark the annual spring rally in hog prices. Bullish summer lean hog futures levels are predicting that the trend will continue.

The current rally has nearly kept pace with last year’s spring rally and, should it continue at the 2010 pace into May, it would take “spot” hog values to about $105, according to the CME Daily Livestock Report.

Hog supplies typically decline by about 10 percent from mid-April to mid-June and prices usually reach their high for the year during that time frame. “If this year is normal, we would expect cash hog prices to move up to record highs over the next few weeks which should support futures prices,” says Rich Pottorff, Doane Agricultural Services.

With the nation’s economy struggling to recover, there is reason for continued optimism. “Economic conditions are improving for pork producers in the near term,” says Kent Bang, regional vice president, Bank of the West, Omaha, Neb. “The summer outlook is very good even with the rising cost of corn and high cost of production.” Bang expects April should be the best month for pork profits since early last fall. 

However, high feed prices will keep pressure on margins and pork producers are likely to continue aggressive risk management strategies. “Managing risk will continue to be important as producers continue to climb out of the hole of 2008 and 2009,” says Bang. “We will continue to look closer at working capital and where there is not adequate cushion to absorb the volatility, there needs to be a risk management plan in place to reduce exposure to market changes. While hog prices should remain strong compared to historic levels, feed costs will also remain high.” 

Most pork producers also will be watching the 2011 growing season closely. “Grain prices will be volatile with weather markets and most would agree that even with a large (trend-line) crop, the world grain demand will keep corn prices high and next year’s carryout on the low side,” says Bang.

In addition to the success of the 2011 corn crop, demand also poses a risk. Higher pork prices at the retail level may reduce demand in the near term, especially among budget-conscious consumers. “The biggest threat is going to be the high cost of production and what impact higher meat prices will have on demand,” says Bang. “It would appear that corn costs are going to continue to be quite high going forward, which will make any volatility in hog prices more painful.”