Hog and pork markets have been stressed by trade disruptions associated with the H1N1 flu virus but the Chicago Mercantile Exchange lean hog futures contract still is setting a good benchmark for Canadian producers.
Tyler Fulton, risk management specialist with the Manitoba Pork Marketing Co-op, decided to run several “what if” scenarios to test the relationship between the Chicago market and Canadian prices.
“Everything seems to be working as planned,” Fulton said of the current situation.
The Chicago lean hog futures contract plunged when the H1N1 virus outbreak began in late April but still appears to be relevant for cash and contract prices in Canada.
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CME hog futures are the main market price hedging tool used by the North American hog industry. They form the basis of most contracts and cash market sales.
It works well for Canadian producers so long as the border is open and American and Canadian pork exports have the same international market access.
There is no threat to border access, but Fulton’s test found that if the border was blocked, perhaps by aggressive country-of-origin labelling rules, it would be difficult for Canadians to effectively use the CME hog contract for hedging.
If Canada was to simultaneously lose access to the U.S. and offshore markets, it would suffer a glut of hogs and the U.S. a deficit.
“Conceivably, the best hedge for a feeder pig producer who normally sells to the U.S. would actually be to take a long position (in the month when he would be selling his feeder hogs), exactly the opposite of what he would (normally) do, just because that’s where the exposure lies,” said Fulton, marveling at the possibly bizarre result.
Since the flu panic disrupted the pork market, Canadian and American hog producers have suffered the same price slump. Fulton said he’ll be watching the next round of packer formula contracts to see if there’s any change.
