The CME lean hog index has plummeted since hitting an all-time record at 134.17 cents/pound on July 16. It will almost surely be stated at just 107.19 when it was officially quoted Friday morning, which would represent a plunge of 26.98 cents in just five weeks. A seasonal breakdown is to be expected during the second half of the year, but the most severe losses usually occur during the fourth quarter.
In fact, drastic late-summer crashes have historically been rather rare. The two most similar instances occurred in 2002 and 2012, when the index fell 26.34 and 35.45 cents/pound, respectively, from second-quarter highs to lows posted in early-to-mid September. Those represented percentage losses of 46.5% and 34%, so the recent breakdown at 20.1% looks relatively modest. Conversely, if the current trend lasts into early September, the difference may prove much smaller.
Cash hog prices posted their second-half lows in September 2002 and 2012, which suggests that scenario might occur again this year if the current situation doesn’t change. Such a drastic drop might reignite demand from export and domestic customers, whereas the June Hogs & Pigs report implied autumn hog supplies will average about 6 percent under year-ago rates. This is one reason we reduced hedges this week and would suggest continuing to do so if/when prices keep dropping.
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.