Hog rally threatened, says analyst

Bouncing off a bottom feels great if the bounce keeps going, but some analysts haven’t changed their generally dim view of the longer-term hog market situation.

“My sense is that it’s going to be a grind to get much higher here, but I’ve been humbled in the last month,” said Tyler Fulton, markets expert with Hams Marketings.

“The pork cutout needs to make those gains too.”

Packer profits have shrunk as hog prices rose, and they need higher pork prices to repair their operating margins.

The big rally in Chicago lean hog futures began in late March at less than US $60 per hundredweight and has carried through to $83 May 15.

Figuring out why the bounce happened would help provide a understanding for price predictions, but that hasn’t been easy.

The bounce began even as hog numbers surged.

Retailers weren’t aggressively slashing prices to build pork de-mand as the impact of porcine epidemic diarrhea wore off and led to more market ready hogs. Supplies seemed heavy.

Fulton suspects foreign buying of U.S. pork was the spark that started driving cash pork values higher, something that’s only gradually showing up in the statistics.

“It appears that China stepped up to the plate in April,” said Fulton.

U.S. exports have generally been weak this year, undercutting a bullish driver of the past few years.

The U.S. West Coast port labour dispute tied up pork exports early in the year. The dispute was settled in late February, but it took another month to clear the backlog.

As the University of Missouri’s Ron Plain noted in a May 8 commentary: “Export demand for U.S. pork was down 26 percent in March.”

The strength of the U.S. dollar has hurt U.S. pork exports, but Plain said foreign pork powers have also been aggressive.

“Foreign competitors have done a good job competing.”

The good news is that American domestic demand has been stronger year-over-year for 27 straight months.

“The prolonged growth has to do, I think, with the U.S. economy getting steadily better,” said Plain.

“It’s been slow growth since the 2009 recession.”

Plain noted the poor packer margins that have dominated recent weeks, with the first week of May seeing cut-out values at almost 97 percent, leaving just a three percent margin. That has and will likely reduce the pace of hog slaughter.

“When they’re not making money killing hogs, they kill fewer hogs,” he said.

Saturday shifts have been cancelled, and packers aren’t pushing their kill lines to go faster.

Fortunately for farmers, this year’s fourth quarter does not yet appear perilous. That’s the time of year when pork prices are weakest and can crash because of heavier hogs appearing at plants and holidays that reduce pork flow.

“If numbers come in line with the last inventory report, then we should have enough kill capacity,” said Plain.

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