The USDA March Hogs and Pigs report released March 26 delivered some long-awaited good news to U.S. pork producers. The Planting Intentions report issued last week also has added to the optimism.
With the momentum currently being experienced in hog futures prices, producers have opportunities to book profits not seen for over two years. “You want to use this rally as an opportunity to hedge additional sales of market hogs,” says Darrell Mark, Extension livestock marketing specialist, University of Nebraska. “The returns offered in the futures market for the summer months were good before the Hogs and Pigs report was issued and have improved even more since then.”
Mark suggests that now is the time to book profits. “I have a hard time envisioning what additional bullish factors would further improve returns for the summers months, so taking advantage of good returns now seems like a prudent thing to do.”
Because of the decline in farrowing intentions, there was enough bullish news for the fourth quarter deferred futures contracts to move projections for losses into breakevens or slight gains for late 2010 and early 2011. “Depending upon a producer's cost of production, I'd recommend taking advantage of that on some percentage of late fourth quarter expected production,” Mark notes.
If producers are reluctant to make sales or hedges in an up-trending market, Mark suggests a strategy of buying puts to protect the downside while still locking in a profit on lean hog prices. “Despite premiums being expensive, I like to think of the increasing market as providing the opportunity to pay those premiums out of some of the market increases,” the economist says. “If the bull move isn't over, funding margin calls won't become an issue then either.”
The Planting intentions report actually showed another 2.298 million acres of corn to be planted in 2010, and another 598,000 acres of soybeans, which should be friendly to pork producers. However, these increases were generally not as large as what many were thinking they would be.
“Granted, there is still an opportunity for corn and bean acres to grow because things are drying out fairly well in the western corn belt and there are profits yet in growing corn and beans,” Mark notes. “However, even if growers actually plant what they said they will, which would be the second highest corn acreage since 1949 and the largest soybean acreage ever, these crop acres will not hugely increase the ending stocks projections for the 2010-2011 marketing year, especially for corn due to the growth in ethanol use.”
Weather, as always, plays into the risk factor going forward. “We will see the corn market sensitive to weather risk through June/July, predicts Mark. “Any breaks in the market should be used as buying opportunities. The bearishness of the grain stocks report on March 31 provided such an opportunity.”
Mark also warns of a too-rapid pig crop expansion as pork producers evaluate profit potential. “The potential downside of lower inventory numbers that lead to improved profits will cause the industry to expand again, and if that occurs too quickly, it could erase some of the profits currently offered in the market.”