The hog market is sizzling with uncertainty and it is impossible to tell now if it will be able to stay in the pan of hot domestic prices or fall into the scorching fire of an international trade war.
It’s creating a challenging time for hog price hedging, since prices could easily go either way in coming months. Farmers should be thinking of protecting some forward prices, even if the market is rallying on strong domestic demand.
“We’ve switched out one uncertainty for another,” said Tyler Fulton, manager of risk management for Hams Marketing. “My fear is that there will be an all-out (U.S.)trade war with Mexico.”
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Only three months ago the hog market was transfixed with anxiety that fourth quarter 2016 hog supplies would outstrip the ability of North American packers to slaughter.
That fear evaporated as producers managed the fourth quarter pig flow to squeak through without exceeding capacity. Exceptionally strong demand consumed the big pork supplies generated by the record slaughter pace.
With two new packing plants coming online in the U.S. in the next year, strong domestic demand continuing and prices rising, farmers should be able to count on 2017 being a highly profitable year.
“If you had told me at this time last year that we would be running four percent more pork and be sitting with a cutout (value) in the mid-US $80s and cash hog prices in the low $70s (cwt), I’d have said that’s impossible,” said Fulton.
But rather than being able to relax and assume they will be able to reap good prices this year, farmers now have to worry that it could all collapse in a moment.
“You never know. (U.S. President Donald) Trump just has to slip a switch,” said Fulton.
With the U.S. relying on Mexico for about one third of its pork exports, representing about eight percent of U.S. production, suddenly losing the Mexican market would be a disaster.
If Trump picks a trade fight with Mexico, as he has threatened to do, don’t be surprised to see Mexico retaliate against U.S. pork.
“The first thing that I think they would focus on is meat,” said Fulton. “It’s easy. They’ve done it several times before.”
If Mexico blocked or substantially reduced U.S. pork imports, pork would begin piling up in the U.S., putting enormous pressure on the domestic U.S. market.
According to the U.S. Meat Export Federation, exports to Mexico have been surging.
“A remarkable second half pushed 2016 pork export volume to Mexico to its fifth consecutive record at 730,316 (tonnes), breaking the previous record by two percent,” said the USMEF in a Feb. 10 press release.
That pushed 2016 into the second-largest exports ever to Mexico and a seven percent increase from 2015 volumes.
“At this time of record-large pork production, it would be hard to overstate the importance of Mexican demand to the U.S. industry,” said USMEF president Phillip Seng.
Exports to Mexico are worth about $16 per U.S. hog, so keeping that market open is “absolutely critical” to the industry, Seng said.
Fulton said a dispute with China could have a similar impact if pork was hit. USMEF noted that U.S. pork exports to China are also at record levels.
A trade war could crash U.S. prices, which would hurt Canadian producers because the prices for their hogs are tightly related to the U.S. price.
As well, Canada could not easily step in and fill those markets the U.S. vacates in the event of a trade war. “That takes time to develop. That does not happen in eight to ten months.”
Fulton is recommending producers begin hedging prices out to the end of August, using each $5 increase in Canadian prices as a trigger to lock in 20 percent of production. In other words, if prices rise $10 per 100 kilograms they would have 40 percent of their coming production locked-in.
Farmers could protect prices to the end of 2017 if they are particularly concerned.
