The Lean Hog Perspective
This lean hog and feed commentary contains thoughts from Jeremy Knutson, a commodity broker with Hurley & Associates.
What Is the Fate of the U.S. Hog Producer?
Aug 16, 2012
The estimate on where corn demand is cutoff is currently a major debate. Some feel demand destruction is taking place while others think that $9-$10.00 corn prices will be needed to effectively cut off demand. I am in the buoyant camp. I think that the $8.00 futures level in corn is an area where we see resistance in the market and the $6.50-$7.00 area is where we find good support and trade within this range while the market further assesses the crop size.
Ethanol plants have negative margins based on the information the CME Group distributes as well as some other proprietary groups that we get information from. Some argue that they are not losing money but on the same token, some plants have shut down and capitalism would suggest that you don’t shut down something that is making money, assuming it is your main source of revenue.
Hog producers that haven’t hedged anything for at least the 4th quarter of 2012 are losing their shirts right now. It’s the worst the crush margin has been in the last two years. Once you get beyond the FH February delivery time-frame in 2013, the crush margins begin to stabilize and eventually go positive in LH April THROUGH the end of the year in 2013. The hog market has priced in higher priced feed as well as some liquidation in the hog industry.
Below is a seasonal chart of the lean hog cash index and as you can see we are near the end of seasonally higher cash prices. The red line is the current year activity.
I’m not an optimist for the remainder of 2012 unless we hit a major run in exports, however, I’m friendly the 2013 market starting near the end of the 1st quarter.
U.S. crop size discussion
My opinion is that the lowest yield estimates for 2012 have been made. If you look back to 1988 and 2002, we have our lowest estimates in the Aug USDA crop production report and the yields moved higher from there. This can be deceiving in a sense because the yields could go up and the harvest acres go down, therefore still reducing the crop size. The market chatter should begin to switch solely to production size and away from yield. Harvested acres are the moving target now in corn.
Managed money is the group that will probably scratch our heads moving forward. You will notice in the corn market that we bottomed around the 23rd week of the year and rallied very strongly into the current time-frame. When the "funds" (managed money is one of 5 categories the CFTC tracks) decide they want to take the profit on these positions they will sell the market off and we will be wondering why because of short supply.
The funds don’t make money with a futures position if the market is stagnant, it needs to move. If they decide to sell it could cause a snowball effect and push the market a lot lower than it fundamentally deserves to go. This should allow for the end users to come back into the market and buy coverage to allow them to lock in profits for the deferred time-frame and start the entire cycle over again. I’m making these statements on deferred profits based on the hog industry.
If you have any thoughts or comments, I would enjoy hearing them. Email me at firstname.lastname@example.org
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