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Soft Demand Weighs On Hogs

The hog market has a tendency to move from historical highs to historical lows and this is a very good opportunity to lock in some decent margins.

Cash hog values remain under pressure as demand continues to wane. Offshore movement has slowed and the domestic market is struggling to absorb larger supplies of all meats. The Peoria market was hovering at $35/cwt during the first week of February, down $1 from a couple of weeks earlier.

Cash prices in Western Canada were marginally higher due to weakness in the Canadian dollar. Values were quoted in the range of $1.35 to $1.45 for nearby delivery; Manitoba contracts for June were reflecting a price of $1.78/kg.

The summer lean hog futures are trading near record highs and showing some good prices from a historical perspective. Given the current risks, producers should be locking in at least 50 per cent of their production or at least taking some protection for this timeframe. Looking at past price patterns, the hog market has a tendency to move from historical highs to historical lows and this is a very good opportunity to lock in some decent margins.

Pork and poultry exports have potential to be down 10 per cent in 2009. We are seeing a contraction phase in beef, pork and poultry but the lack of export movement is resulting in larger supplies for the domestic market. Without going into detail, the U. S. domestic market will have to absorb an additional 351 million pounds of poultry, nearly 500 million pounds of pork and almost 200 million pounds of beef due to lower exports.

This is going to be a problem given the current economic situation.

Consumer income continues to decline resulting in lower demand for all meats. U. S. unemployment is now at 7.2 per cent. Pfizer, Caterpillar and Home Depot announced major layoffs in late January; Caterpillar alone is laying off 5,000 white-collar workers. Analysts feel U. S. unemployment could reach 10 per cent by September 2009. Many of these layoffs are high-end paying jobs such as in the financial sector, pharmaceutical, research and development and engineers. Canada is expected to lose 250,000 additional jobs this year, bringing the unemployment rate to nearly eight per cent by the end of 2009. The recent stimulus packages from the U. S. and Canadian governments are receiving mixed reviews. It is doubtful government financial aid can reverse the normal course of an economic cycle. Recent data suggests North American demand for red meat was down nearly five per cent during 2008 and this will deteriorate further in 2009.

Mexico is the largest market for U. S. pork. In late December, Mexico banned pork from certain U. S. plants due to sanitary conditions. However, many analysts felt this was in retaliation to the U. S. Country of Origin Labeling rules. I’m expecting further trade retaliation from Mexico and this is a major risk in the hog complex over the next four months.

The Canadian dollar has major support in the range of US$0.77/ Cdn to US$0.79/Cdn. The equity markets appear to be stabilizing and this will cause money to flow from U. S. dollars back into equities. This will likely result in a stronger Canadian dollar and temper domestic hog prices.

In conclusion, the domestic markets will have to absorb larger supplies of all meats in 2009. Lower consumer incomes, lower exports and potential trade retaliation will result in lower demand. Strength in the Canadian dollar will also limit any strength in domestic prices.

Gerald Klassen analyzes cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. He can be reached at [email protected]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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