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producers are starting to talk about even seeing profits

The deteriorating economy continues to weigh on the hog complex. However, despite lower restaurant demand, retail movement has actually increased resulting in slightly higher cash prices. Talking with hog producers in Manitoba, apparently some producers had positive margins for the first time in nearly 18 months. This appears to have renewed the enthusiasm and the industry is expecting higher prices during the second quarter of 2009. Packing margins have been floating at breakeven values but product values are strengthening. This should bode well for the industry and increase the weekly slaughter rate. Market-ready hogs are backing up in the country as reflected in higher marketing weights. I’m expecting the market to come under pressure in the third quarter as supplies build. Look for prices to stay under pressure in the fourth quarter as well baring any significant recovery in the economy.

Weakness in the Canadian dollar has been a main factor strengthening Canadian hog prices and increasing pork export demand. At this time, it is hard to build a case that the loonie will rebound back to recent highs. Canada is dealing with contracting GDP; the government is also running a large deficit. The current account also went into deficit in the final quarter of 2008 due to slowing exports. This is the first time in nearly a decade that we have experienced this type of drastic change in the Canadian economy in such a short period of time. The decrease in the Bank of Canada lending rate also set a negative tone. Packers in Canada will have to keep prices at a slight premium over US values to source adequate supplies.

Late in 2008, US Country of Origin Labeling slowed Canadian exports of slaughter hogs and feeder pigs. Swine exports for 2009 were earlier expected to be down 25 percent in comparison to 2008, according to the USDA. However, I feel this is overstated and talk in the industry suggests exports may only be down marginally due to the current exchange rate. There is still a fair amount of uncertainty how packers will respond to the “voluntary labeling practices” as proposed by USDA Secretary Vilsack.

Looking at the US weekly sow slaughter, herd contraction may not continue as expected. This may also weigh on fourth quarter and first quarter of 2010 hog prices as supplies would be larger than previous estimates. The market is expected to stay firm throughout the second quarter and producers have an opportunity to hedge some positive margins. The industry has to experience a long period of negative feeding margins to sustain the contraction process.

I have attached a chart of the CME continuous lean hog futures. At the time of writing this article, the August lean hog futures were trading at the $75 area, which is near historical highs. Producers may want to look at some type of option strategy that protects the downside while leaving the upside open given the current risk reward.

Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For questions or comments, he can be reached at [email protected]or 204 287 8268.

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.

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