What could go wrong? Maintaining discipline amid market uncertainty

Flexible strategies can be employed to allow for margin improvement while providing protection against adverse movements in hog, corn and meal prices.


By Dustin Baker, Commodity & Ingredient Hedging LLC

via National Hog Farmer - Aug 01, 2022


As we work through the dog days of summer, there seems to be no shortage of optimism among many hog market participants. Much of this exuberance is rational given strong domestic demand, lower sow inventories across the United States, European Union and China, and the expectation of stronger pork exports in the last half of the year. Cash hog prices have been advancing throughout the summer while corn and soybean complex prices have perhaps found seasonal bottoms over the past couple weeks.


While these factors support hog margins, we know market dynamics can, and often do, change quickly. It is natural to focus on the bullish narrative of the market, but discipline should be exercised as we begin looking at establishing margin coverage at historically strong profitability in deferred periods.


Hog market considerations


The bullish case for hogs is compelling but continued headwinds on the trade front could complicate matters. Compared to last year, USDA projects U.S. pork production to fall 1.9% in 2022 while they peg 2023 production to increase only 1.3% year-over-year. Domestically, retail pork prices continue to set new record highs but remain near their long-term average as a share of retail beef prices.


Of course, for a sector that exports a quarter of its production, no story on pork demand can be complete without looking at international trade. USDA projects 2022 pork exports to fall 6.4% from 2021. Through May (the most recent month for which complete data is available), pork exports were down 20% from a year earlier. Of the major trading partners, only Mexico has posted year-to-date gains from 2021.


China's reduction in imports from all sources has weighed on global pork trade in general and the strength of the U.S. dollar is making American product more expensive for foreign consumers. China's slowing economy, coupled with the prospect of a recession on the horizon, could reduce international demand.


USDA forecasts 2023 per capita pork consumption to be 52.4 pounds per capita. If realized, this would tie the highest level witnessed since 2000, but it is important to remember any disruption in or destruction of export demand will only exacerbate the ones put on the domestic consumer next year.


If the last several years have taught us anything, it is that things can change in a hurry...


Feedstuff considerations ...


Risk management implications ...


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