Hog Futures Rally has Plenty of Fuel Left in the Boosters

In my January article, I stated that hog futures were on the launch pad, ready to rocket higher. I went on to list, in bullet format, 15 bullish fundamentals that I thought would cause hog prices to shoot higher like a rocket. In my February article, I had to admit that although the deferred contracts had been working higher, the action was far short of a rocket liftoff. That’s all changed. Hog futures have lifted off the launch pad. The February contract expired strong, and April futures have soared. The launch started Feb. 2 at $76.00/cwt. and continued higher. By the end of February, April futures had posted a contract high at $90.67 before pulling back nearly 500 points off the high in the first week of March.  

In my opinion, the rally is not complete; there’s plenty of fuel left in the boosters. In the first eight weeks of this year, pork production, through a combination of large numbers and heavy weights, was record large. However, during this same period, the cash hog market jumped by $23.50, an increase of 42% from the end of 2020. At the end of February, cash hog prices were up 55% from the same period last year. The hog carcass on Jan. 4 was calculated at $77.77. At end of February, the carcass was quoted at $93.84, up $16.07 or just over 20%.  

We appear to be embarking upon a perfect storm that is capable of driving hog prices even higher from current levels. First, producers are very current and weights are confirming this as they’ve started trending lower. Second, packers appear very concerned about the available butcher hog supply in the face of very strong demand for U.S. pork.

There appears to be a hole in the hog supply. At first, we thought these holes in the numbers were likely created by a serious bout of PRRS and PEDV in sow units last fall. However, just recently it appears the holes are too large, much too large, to be explained by disease alone. As we’ve kept digging, it appears that some very large sow units may have liquidated last fall, simply pulling the plug. They were likely reacting properly to the market signals. When you’ve lost money for over 12 months, suffered through the disaster with COVID-19 last spring and summer, only to be bombarded with disease problems in the fall in tandem with the realization that feed prices were headed higher, culling aggressively is purely logical. We’ve become so accustomed to illogical decisions in the hog industry, for so long, that no one realized the gravity of the contraction.

We’ll learn more upon the release of the upcoming quarterly USDA “Hogs & Pigs” inventory report that is slated for release on March 25. The survey will provide inventory as of March 1 and certainly should provide some evidence of herd contraction. Only a small amount was picked up in the December report.  

A third factor on the radar is that pork in frozen storage, approaching spring/summer, resides at a twenty-year low. Belly stocks are down 56% as of Feb. 1 compared to one year ago. Bone-in ham stocks as of Feb. 1 are record low for this date and down 42% from last year. Total pork stocks are down 26%.

The fourth factor turns to demand and the theory that consumer demand for “everything” including meat will jump substantially as vaccinations continue and restrictions are eased. The restaurant industry is gearing up, which is a direct function of foodservice demand. Indeed, the March employment report, released March 5, showed the restaurant industry added 355,000 new jobs in February. Recent projections peg second quarter GNP growth up more than 10%. In addition, the difficult-to-measure “pent-up” demand is likely going to be huge into the summer season. Stimulus money of $1.9 trillion will be hitting, and a recent report indicated the U.S. consumer has saved $3.9 trillion in 2020. As mitigations fade—and they’re fading fast—the U.S. consumer is going to explode with economic activity. Pork consumption stands to benefit greatly as this demand is unleashed.  

The fifth and final factor is the development and confirmation that China has had another resurgence of African swine fever. Late last year, Chinese officials reported, in boastful fashion, that their hog herd had been restored to 90% of the pre-ASF levels in 2017. They went further to indicate they would be fully restored by the middle of 2021. Frankly, and I stated this at that time, that I was never buying what they were selling. It was totally unrealistic to believe they had whipped ASF in about 18 months. Russia has been fighting this disease for ten years. What appears to be happening in China is a repeat of the first outbreak that started in August (at least that’s when it was first reported) of 2018. The disease is back, is spreading from province to province, is not just localized and appears to be entering their food distribution system again. When an outbreak occurs, producers rush hogs to market, regardless of weight, before they are forced to cull the animals. Sending possibly infected animals to slaughter could very well mean that China will still be battling this disease several years from now.  

Recent reports from highly reliable sources suggest that China has likely lost 7 million to perhaps 8 million sows over the last two months from ASF. This is more sows than in the entire U.S. hog herd, lost over a period of eight weeks. Does this shed some light on the gravity or potential gravity of the situation?  

As I stated in February, it appears that China is facing a severe food insecurity problem. Make no mistake, China will get the pork they need. That’s why they purchased Smithfield Foods years ago. Data just released confirmed that Chinese meat imports during the first two months of the year are up more than 27% compared to the same period one year ago.  

Indeed, it appears the rocket is fully loaded with fuel and ready for a long ride, an impressive move higher. My upside targets reside at $98.00 in the April hogs and a first target of $102.00 in the June contract. A move to $105.00 is also very likely. If the “Hogs & Pigs” confirms contraction, you’re looking at lower production right into the teeth of higher demand. In this perfect storm, the fall hog contracts are capable of reaching $100.00.  

We work with hog producers, and while we’re not currently actively hedging production, when price targets are achieved, we will develop and execute hedging strategies. Currently, we are executing bullish option strategies for new crop corn, protecting our clients from a surge upward in corn prices next winter. If you want to talk, feel free to contact me by clicking the button below.