February 28, 2005
HOG FUTURES OFFER GREAT PRICING OPPORTUNITIES?
Lean hog futures are dangling a huge carrot
in front of hog producers. That carrot is the opportunity
to forward price 2005 production at levels that would result
in a repeat of last year's great returns. While no one knows
how market events will unfold, there are several bearish clouds
that producers need to consider.
What was the source of last year's nearly $53 average live
weight price, and will those factors continue for 2004. Pork
production in 2004 was up nearly three percent to a record
20.5 billion pounds. Generally, record high production would
result in low prices, but demand was the stimulant to high
On the demand front, pork exports last year were up 25 percent
led by increases of 15 percent to Japan, 18 percent to Canada,
and over 50 percent to Mexico. The those huge expansion was
dominated by the nearly 80 percent drop in U.S. beef exports.
The world bought more pork from the U.S. last year since much
of the world was not buying U.S. beef.
The pork trade picture will likely change in 2005. The probable
opening of the Canadian border to live cattle imports in March
will increase domestic beef supplies and lower cattle and
beef prices. More competitive meat supplies will not be positive
for hog prices.
The potential opening of beef exports to Japan, South Korea,
and other countries may still occur by mid-year. This is a
high priority for the new Secretary of Agriculture, and progress
appears hopeful. If beef exports are resumed, demand for pork
exports will be dampened in the last-half of the year. On
the trade front, then, hog prices may not have as much support
as last year.
On the domestic side of demand, high-protein diets were often
mentioned as a reason consumers were so anxious to get their
hands on pork last year. This was likely a very positive factor
for prices, but there are far fewer press articles promoting
the advantages of these diets this year compared to the first-half
The final domestic demand concern is the issue of marketing
margins. Packer margins and retailer margins were narrow in
2004. In fact, those smaller margins accounted for about $5.25
per live hundredweight higher hog prices. Another way to say
this is that the average 2004 hog price of $52.59 (51% to
52% lean hogs) would have been $47.30 if marketing margins
had been closer to the more normal levels of 2003.
Of course, pork supply could provide some source of worry
as well. While USDA has reported that U.S. producers have
not yet expanded the breeding herd, the March Hogs and Pigs
report would be the earliest to show some signs of expansion
based upon a one-year lag from very favorable hog prices in
the late winter of 2004.
What is the size of the "forward pricing carrot?"
Using lean hog futures prices on February 28, 2005 and historical
basis levels, forward pricing opportunities appear to provide
a net live cash hog price of about $54 for hogs to be delivered
from March through September. For the March through December
period the average is nearly $51.00 on a live weight basis.
These are obviously extremely profitable prices and a sufficient
reason to be forward pricing right now. But is early March
the best time of year to be forward pricing? The historical
seasonality of July and December live/lean hog futures says
no! For both the last 10 years and the last 25 years, peak
futures prices, on average, were reached in the first-half
of May. In fact, on average from early March until peak prices
were reached in early-May, July futures prices tended to rise
about $2 to $3 per live hundredweight, and December futures
In summary, forwarding pricing opportunities are currently
excellent. History suggests that some further seasonal strength
may be expected going into early May. However, opening of
live cattle and beef trade this spring and early summer may
cause lean hog futures to increase less than normal. Each
pork producer needs to weigh the current pricing opportunities
against the threats, but the important message is that producers
should be watching that "tempting carrot" closely
and be prepared to take a few bites in the next couple of
Issued by Chris Hurt