National pork month kicks off

October 4, 2016 12:27 PM

Lean Hog 

It is now National pork month. This month of pork features at the retail counter was started to help each the strain from the heavy supply portion of the year. The effect on this year's pork pricing won't be easy to calculate. We are coming into a very well supplied meat environment.

From a theory standpoint we can all agree that the market is telling us we just have too much pork. Prices have fallen partly from the increase in pork production but also from sharp push-back from end users. The total pork revenue from end users has fallen. Interestingly, the share of that smaller pie going to producers has also declined. This exerts an artificial pricing problem. During tight supplies end users bid up for the remaining product and the price goes to those extremes beyond economic value. We are dealing with the opposite for 2016 and 2017.

In addition to an oversupply of pork and an oversupply of total meat we have to note that producers don't have the losses in hand needed to convince them to liquidate yet. Breakevens are at $61. They just started to lose money last week. Typically, producers need to lose money for three months in a row before they liquidate. If they go by tradition, the decision has yet to be made. On the other hand, every producer is now raising their level of concern about this issue. CME Group lean hog futures imply losses for production for the next seven months. Surely that has got to be something. Liquidation certainly was not in the cards on Friday's report but that was surveyed around Sept. 1. Have the losses since then changed their mind?

In the short term we remain very concerned that the mid-October through November kill level, as determined by the 120-179 lbs weight group, will run 3.7% over last year. About 4% more pork than last year's horrible fourth quarter, when we have even larger levels of competing meats, and when there is no sign yet of liquidation...$44 December hog futures is ridiculously too low. Given the current environment though, we are not buying.

Producers who followed Allendale's recommendation on June 22 should have all hogs to be marketed through the month of February locked in via the December contract. Those hedges should have been applied at 65.42, the open of the 23rd. We still advise to hold all hedges.

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About the Author

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com.