There’s been a nice rally in hog futures and analysts are wondering whether it’s a turning of the tide of sentiment away from the incessant negativity that has dragged down hog prices and killed the hoped-for spring and summer rally.
Chicago lean hog futures rose from about $52-53/cwt for the October contract in late August to $57 by September 10, and from $63 to $69 on the May contract – or about a 10 percent rally. They sold off a bit at the end of the week, but not catastrophically, leaving hope that the rally is intact.
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Manitoba Pork Marketing Coop’s risk management manager told me he thinks the hog market wants to rise, and recent USDA sow numbers gave it the excuse it needed.
“I think the trade was waiting for some sign, any sign that the U.S. herd was starting to contract,” Tyler Fulton told me. USDA found that sow slaughter had increased two weeks running to four to five percent above ’08 levels, rather than lagging last year, which it has been doing.
“Finally the trade got some confirmation that we’d be looking at a tighter supply next year.”
That not only created a supply and demand type rally in the mid-2010 futures contracts, but also in nearer-by months, like October and December. That’s a rally based on market psychology and changed sentiment rather than fundamental factors, because extra sow slaughter isn’t going to help the short term pork supply situation.
In the longer term it’s great to get rid of sows because by the middle of 2010 that’ll mean fewer market hogs are coming to market. But that slump in production won’t be felt for many months, which is the period of gestation and the feeding of the (absent) new litters to market weight.
So the market’s probably rising in the nearby contracts simply because the mood has changed, Fulton suspects.
“It’s an anomaly, because if anything it should be the opposite direction that these sows take the market, because it means the market has to clear that much more pork. It may be sow meat, but it’s all part of the complex.”
This situation reveals the profound influence sentiment can have on the market, overruling fundamental factors, and has Fulton musing that it might be providing a good selling opportunity, because the fall cash market may have trouble maintaining these prices when the surge of market hogs begins in October.
“Personally I think those October and December contracts are quite good value because I don’t know if the fundamentals really support the rally we’ve had in the past week.”
