Hog Market – The (Really Cheap) White Meat

While we were all preoccupied with the lack of movement in the equity markets the past few weeks (not to mention the “meat casino”), the much lesser known Hog market was consistently dropping in price, down to fresh 2016 lows. Our own Tom Chavez snapped this picture at a local grocery store in Illinois.

The reality is a fall in futures prices is needed well before the price in the supermarket changes, and you can see that it has been a months-long drop that has taken Hog prices down roughly 29%.

Hog Market

(Disclaimer: Past performance is not necessarily indicative of future results)

Hog Market

It turns out that the hog market not only has record supply but is anticipating even more of it in the not too distant future, resulting in producers trying to push product through the system as quickly as possible to prepare for an abundance of pork in the future.

Let’s start with the obvious price movers: supply and demand. Data is showing the average daily hog slaughter (when you slaughter a hog, you create supply) in July was a record high, and hog-slaughter tends to be at its highest at the end of the year and on Saturdays, via Ron Plain of National Hog Farmer.

“Hog slaughter is highest during the fourth quarter; at least it has been each year since 1986. Hog packers often run plants at or close to capacity during weekdays in the fall. The increased fall hog run is handled by slaughtering more hogs on Saturdays. Slaughter capacity was tested last year.

The two biggest Saturday kills ever were Nov. 28, 2015, and Jan. 2, 2016. The hog slaughter record for a single week was 2.5 million head slaughtered during the week ending on Dec. 19, 2015. Four of the all-time top 10 slaughter weeks were in November or December of 2015.”

According to Ron, it looks like there’s more supply to come.

The June hog inventory survey implied daily slaughter will be up 2.5% in October and November. Since barrows and gilts are usually slaughtered at six months of age, December slaughter will depend largely on the June pig crop.

For a more visual outlook, take a look at the blue line (2016) compared to the dotted (2015) and the red line (the average) of Saturday Hog Slaughters.

Hog Market

(Disclaimer: Past performance is not necessarily indicative of future results)

Chart Courtesy: National Hog Farmer 

If 2016 proves to provide a larger slaughter than 2015, we could be looking at some startling hog prices in our future. We asked RCM Alternatives’, Thomas Chavez, who specializes in Ag and Meat markets for RCM clients, and he says it’s not just an issue with the number of hogs coming through the pipeline, but having the bandwidth to take on this supply.

There were supposed to be several new packing plant opening this fall, but delays in getting the facilities open in the fall have pushed their opening to next summer.  In the meantime, producers expanded hog supplies in anticipation of this additional capacity coming on line this fall.  Without this additional capacity, existing slaughter capacity will be overwhelmed by the size of hog supply.

So we may have a situation of more supply in anticipation of an expanded supply chain, bumping up against the reality of a faulty/not ready supply chain. This is the same thing we saw for a time with all of the Dakotas/Canadian tar sands/fracking Oil being produced in massive amounts, but no way to get it out of the middle of North America. In plain English – there’s the potential for more hogs, but nowhere to turn them into pork.

Mr. Chavez points out it could also get worse with the recent bankruptcy of Hanjin Shipping. You might be wondering what Hangjin, a cargo shipping company, has to do with pork prices, but when you consider that Hanjin currently has $14 Billion in goods waiting on cargo ships waiting to be unloaded, that Hanjin amounts to 7.8% percent of all Trans-pacific trade volume to the U.S., and that South Korea, China (Hong Kong), and Japan imports roughly 200 million pounds of pork per month from the U.S, you have to wonder if their ability to get their hands on US pork will be impacted.

Hog Market

(Disclaimer: Past performance is not necessarily indicative of future results)

Chart Courtesy: National Hog Farmer 

At the end of the day, these types of outlier events are exactly the types of things that give global macro and commodities based alternative investments their unique return drivers. When prices move on factors such as a South Korean shipping company and delays in slaughter-houses coming online, you’re well outside the world of central bank influenced markets, a welcome sign for those watching the paint dry in global stock index, currency, and fixed income markets.

Chavez says if these conditions don’t get better, we could be looking at prices in the $20 range, and additional 67% fall in current prices {Disclaimer: Past performance is not necessarily indicative of future results}.

P.S. – The CME is making changes to the lean hogs market to make it more reflective of the cash market, which could spell more volatility in the future, but a more accurate hog market.