The chart of the week is the estimated hog farmer breakeven level and the upcoming hog futures market prices. Hog farmers, like the rest of the protein industry, have struggled with profitability which has led to curbed production levels. Typically when hog farmer profitability is poor like it has been it causes a surge in the breeding herd slaughter (sows) so less piglets are produced leading to a tighter hog supply. The effect is to influence hog prices higher so profitable margins can return. And strong sow slaughter was the case for the better part of 2008 until the fall from which it has remained fairly average to date. In that same time sow prices have nearly doubled. Why would sow slaughter only be average with spot models suggesting poor producer profitability? I believe it’s due in a large part to the premium in deferred hog futures which, as one can tell from the chart, are presenting several months of profitability for hog farmers if they hedge via the futures markets. The nearby market April profitability may look poor, but if farmers hedged last summer they would have been able to lock in a solid margin. So although the spot market may be poor for hog farmers, futures are presenting profitable opportunities which has slowed sow slaughter and could mitigate the expected declines in pork output this year. As of late, the same opportunity has occurred for milk farmers due to high premiums in deferred milk futures which could cause expected milk output declines to be mitigated as well.
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