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Hog Prices Recovering

(million pounds) US QUARTERLY PORK PRODUCTION US QUARTERLY TOTAL PORK PRODUCTION (Million Pounds, Broilers And Turkeys) 2008

10818

11147

11173

10576

2009

10077

10420

10595

10600

% change

-6.85%

-6.52%

-5.17%

0.23%

1 2 3 4

2008

6024

5593

5632

6098

2009

5811

5400

5490

6000

% change

-3.54%

-3.45%

-2.52%

-1.61%

1 2 3 4

Hog prices appear to be slowly recovering after the H1N1 influenza outbreak in late April. US pork exports to Mexico have improved in recent weeks while the Russian ban on pork and chicken is still ongoing. US hog and pig inventories continue to decline due to the negative financial returns over the past year. Despite lower hog inventories, pork production is larger than earlier expected because of the heavier carcass weights. The hog market is functioning to encourage demand through lower prices. Canadian hog inventory is also contracting as the market discourages production. Canadian exports to the US continue to struggle due to Country of Origin Labeling law. Growing unemployment in North America, lower consumer incomes and sluggish exports will keep prices under pressure for the remainder of the year.

The USDA June1 hog and pig report showed the total US hog herd down two percent from last year; the breeding herd was down 2.7 percent and the market hogs were down 1.9 percent. US hog marketings are expected to be down four percent in the third and fourth quarter. US hog producers have lost money 19 out of the past 21 months; therefore, we’ll likely be further contraction over the next six months. Some analysts feel that we could see a major decline in corporate hog numbers over the next year as investors grow weary of negative returns. Investors are looking to conserve capital given the state of the economy and equity markets. The risks are also quite variable given the political barriers of trade and food safety. Investors don’t like risks that cannot be calculated into their portfolio holdings.

US pork production will continue to be below year ago levels, but this will not cause an increase in import demand from Canada. The Country of Origin Labeling Law has tempered demand for Canadian hogs and pork. Total US pork exports are expected to be 4.183 billion pounds in 2009, down from 4.668 billion pounds in 2008. The problem is that many analysts feel this export projection is optimistic which will keep hog prices on the defensive. Despite the lower production, the US domestic market has to absorb larger supplies in the latter half of 2009 due to the slower export pace. Second quarter exports were down considerably; therefore, we need third and fourth quarter exports to increase sharply to meet the USDA projection. This will be difficult given the current export bans from Russia and China and the Japanese recession.

Earlier in spring, I advised producers to take some protection on their third and fourth quarter marketings. While hog prices appear to have stabilized for the time being, I’m concerned about the health of the overall economy for the remainder of the year. The number of people collecting unemployment is growing and the economy will not see some relief until early in 2010. Higher end restaurant demand will continue to deteriorate causing more pork to be sold in the retail sector. Cash hog values have downside potential from the September through December period due to weaker domestic demand and slower export pace. It may be prudent to look at an option strategy that protects the downside and leaves the upside open.

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.

About the author

Columnist

Jerry Klassen

Jerry Klassen is manager of the Canadian office for Swiss-based grain trader GAP SA Grains and Products Ltd. and also president and founder of Resilient Capital, a specialist in commodity futures trading and commodity market analysis. He can be reached at (204) 504-8339 or visit his website at www.resilcapital.com.

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