Something’s out of whack in the North American pork market.
Midwest U.S. cash hog prices have been strong and packer profitability has been good.
However, Chicago lean hog futures prices have taken a beating, which hurts anyone using futures to hedge their production.
Hog producers might be facing further pain if the futures market turns out to be more accurate than the cash market in predicting where prices are heading.
“Man, have I been dead wrong in this market,” said veteran trader Dennis Smith of Archer Financial Services in Chicago.
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“Dead wrong. I still can’t figure it out. I anticipate the cash market going up, and it does. I anticipate the pork cutout value going higher, and it does. And futures do nothing but go lower.”
Analysts think the break between futures and cash prices is based on pork wholesalers and retailers expecting U.S. consumer demand to decline because of high retail pork prices. At the same time, packers are finding ready demand for carcasses, so the cash market is healthy.
Tyler Fulton, risk management manager of Hams Marketing, said wholesalers believe U.S. consumers will reject pork if prices keep rising.
“I think domestic buyers are balking at the price,” said Fulton.
“Consumers weren’t really prepared to see such huge increases so quickly. What was driving the price higher was exports.”
U.S. pork exports now equal almost one-quarter of production and have jumped by about one-third in the past year.
South Korea’s foot-and-mouth disease crisis and Japan’s earthquake-radiation crisis have prompted wholesalers and retailers in those countries to import pork. Booming economic growth in other parts of Asia is also boosting demand.
However, analysts say U.S. consumers are not in the mood to see higher prices for meat, especially with other costs increasing.
“They are thoroughly convinced the Walmart consumer, the Walmart shopper here in the United States, is not going to buy red meat with gasoline at $4 a gallon,” said Smith.
However, there has been little evidence of reduced retail pork demand. The futures market reflects expectations that something might happen, while the cash market is reflecting actual meat sales.
“We overdid it a little on the futures market,” said Fulton.
June lean hog futures prices should probably be at a seasonally typical $8 to $10 premium to the cash market, he added, but are presently even with cash or even at a discount.
The overall slump in commodity prices since late April has helped drive down pork.
“When the market pulled back, lots of guys jumped on the bandwagon,” said Fulton. “They let the prices collapse for a while.”
However, pork prices have levelled out slightly above $90 per hundredweight and have moved between $91 and $94 for most of May since dropping from more than $100 per cwt. for June futures in late April.
Martin Rice, executive director of the Canadian Pork Council, said farmers are feeling squeezed between increasing feed grain prices and weaker pork prices. As a result, few of them are considering expanding their sow numbers.
“The great uncertainty over cereal grain prices is what is still putting serious constraints on people’s psychology about whether this is a real recovery,” said Rice.
