Sometimes its worth looking at markets off the beaten track of most commodity analysts, ones not beholden to movements in the US dollar or other broad macro economic movements. This week I’m looking at the market for lean hogs in the US, a market where cycles (a feature of all markets) is particularly pronounced.
Chinese pig herd shrank in September by the largest amount since early 2016. Beijing has shuttered thousands of small hold farms across the nation in a drive to impose tough new pollution standards by December, boosting domestic hog prices. In the past high pig prices in China has spurred strong imports of hogs from the US to meet expected demand.
Meanwhile, in the US higher feed prices (corn and soybean meal prices jumped last week ) will raise costs for US farmers increasing the cost of producing each hog and potentially restricting supply. The hog/corn ratio is currently 17.7 which points to stable pig output over the next 12-18 months, however an increase in the price of corn will, all other things being equal lead to a reduction in pig output going forward.
Hogs prices typically show strong seasonality*, with prices peaking in April / May and then bottoming out at the end of August. The opening up of two new major processing plants in September has put a floor under the market as they fight for feedstock and should result in the strong seasonal trend continuing through the fourth quarter.
Over the longer term, hog prices typically take about 3-4 years to move from peak to trough and a further 3-4 years to go full cycle. Hog prices just completed a full cycle and hit the trough exactly 12 months ago in mid-October 2016. All of which points to the start of a major turning point for lean hog futures.
* Lean hog prices show strong seasonality due to biological factors and the impact that the weather has on both supply and consumer demand. Since most pork in the US is sold fresh you cannot carry product from one time period to the next which tends to accentuate the seasonal tendencies.