The recent selloff in Chicago Mercantile Exchange (CME) Group Lean Hogs futures has some people wondering if the hog markets are going to follow the meltdown example set by equity and energy markets over the past few months. I can’t rule out that possibility since meat demand in general, and pork demand in particular, is at the top of my list of risk factors for this year.
There are rumors of a huge slowdown in export shipments -- a reversal of a key driver for our business last year. Mix that with domestic pork demand that was soft for all of 2008 and you definitely have trouble for hog demand. November exports were just barely above one year earlier and the trend since July would suggest that December will be below year-ago levels when those data are released in mid-February. Now currency value changes have hurt some key export customers, primarily Mexico, and made U.S. pork relatively more expensive than product from our three largest competitors – Canada, European Union and Brazil.
But markets are also psychological beasts and when negative sentiment hits one – or, worse yet, is allowed to settle into one or more for some period of time – that sentiment will spread to others.
The recent decline of hog futures prices seems overdone to me and I have to believe a large part of the decline is due to negative market psychology. January and February are, historically, always a doldrums period for pork and hog demand. The holidays are, hopefully, just fond memories and even the modest demand kick offered by Easter ham sales is more than a month away. Pork and hog prices just don’t get much support this time of year. Add in a healthy dose of equity market hysteria and a president, Congress and media who have done nothing but tell us how bad things are and, even with supplies very near the levels I expected based on the USDA’s December Hogs and Pigs report, the futures market have dropped sharply. Perhaps the export downturn is that serious, but this decline appears to be a bit much, given the facts as we know them.
If your equity is very short and your banker is very nervous, then perhaps you should price some hogs for this summer. But if you can – wait. Spring is coming and warm weather usually results in more increases than just the temperature.
To see some objective measurements of the seasonal patterns of hog prices, I recommend readers avail themselves of a resource offered by the CME Group. Each year, CME Group sponsors and publishes the Moore Reports, a series of reports prepared by the Moore Research Group that detail historically profitable futures market trades in all of the commodities for which futures and options are offered by CME Group. A free copy can be downloaded at www.cmegroup.com/education/interactive/moore-report/index.html. You just need an Adobe Acrobat reader to use the reports.
One warning: These books are prepared primarily as a promotional tool to interest speculators in trading CME Group contracts. Speculating carries many risks, so please make sure you understand and consider those before you follow the recommendations.
The books also contain a series of charts like Figures 1 and 2 that represent the seasonal price patterns of the various CME Group contracts. The scale at the right side of the charts indicate the historical tendency for the respective contracts to reach their seasonal (i.e. 12-month period) high (100) and low (0). Each chart shows this tendency based on 15 years of data and five years of data, allowing users to see how market conditions may have changed in recent years.
The chart for June Lean Hogs in Figure 1 shows an expected seasonal peak anywhere from March through May, based on 15-years of data, with the absolute peak in mid-May. The five-year data agree with that absolute peak, but indicate a clear second-best time to sell in early March, with a decided drop off after that date.
The July chart in Figure 2 isn’t, in my opinion, quite so ambiguous. Both data horizons point to early May as a good time to price hogs in July futures. For hedgers, that contract would cover pigs to be marketed after the expiration of the June contract on June 15 this year through July 15, the date that this year’s July contract expires.
One thing comes through when you study these seasonal charts for Lean Hogs – the futures markets are influenced heavily by cash hog markets. The entire Lean Hogs futures complex tends to rise in the spring as cash hog prices rise and fall as temperatures grow colder in autumn. Cash is still king!
The 2008 Moore Reports, which include dates for all of 2007, are the latest available at present, but check the CME Group site again over the next few weeks for the 2009 edition. It will include all data from 2008.
My comment on "chemical castration" in last week’s North American Preview was an incorrect characterization of Improvac, the product approved recently for use in Switzerland to control boar taint and render surgical castration unnecessary. A better description is "vaccination against board taint" since the product is a true vaccine that depends on antiboides and immune response to reduce the size of the testes and prevent boar taint in carcasses from intact males. I apologize for the confusion.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.