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The hog market is currently in the process of pricing in a large production base for the first quarter and once this has occurred, the shift in pork production from the first quarter (5.915 billion pounds) to the second quarter (5.456 billion) could be a record drop. Once supplies begin to decline, the market may be in a position to see a cash-led rally into the spring.
Pork production was higher than a year ago for the week ending January 30th and had been running a little higher than expected over the past few weeks. As a result, the market is in the process of absorbing weak demand and a slightly higher supply than anticipated. Domestic pork consumption is not usually very economically sensitive, and the fact that pork cutout values are already 5% under last year suggests that most of the recessionary demand may have already been fully priced into the market.
The December 30th USDA Hogs and Pigs Report indicated that US hog supplies were down 2.2% from last year. Production of all meats looks to decline in the months just ahead, and Canadian feeder pigs imports have been down sharply in the past several months. This could push spring pork production down 4-6% from last year.
April Hog Basis
The expected drop in production this spring may be at the primary reason for the huge premium that futures prices were holding over the cash market in recent months. The April Lean Hog Basis chart shows that as of late December, April hog futures were trading nearly 20 full points (20 cents per pound) premium to the cash market. As of February 4th, April hogs were just a few points above the cash market and even closer than the 5-year average.
Pork production typically declines from the first to the second quarters of the year, and this is the main reason why April futures typically trade at such a strong premium to the cash market. What usually happens is that after the market prices in a base of production during the January to March time frame, declining production into the spring supports higher prices.
US Pork Production 1st to 2nd Quarter
The second chart shows the net change in US pork production from the 1st to the 2nd quarters for each year since 1990. The USDA’s projections for 2009 indicate that the drop this spring will be a record. This would suggest a higher than normal advance in the cash market in the upcoming months. Other years that had similar declines (aside from last year when hog producers were dealing with mass liquidation due to record high grain prices) were 2000 and 1996. In 2000 April hogs moved from 56.00 in early February to 68.40 by April 13th. In 1996, April hog futures moved from 60.00 in early February to 77.22 in April.
April 1994 Hogs vs. April 2002 Hogs
April 1996 Hogs vs. April 2000 Hogs
Just to be sure you do not see this as a random phenomenon, look at the market action in years with an opposite situation, 1994 and 2002. In 1994, April hogs were near 70.00 in early February and fell to 61.00 into April. In 2002, April hogs were at 62.80 on February 5th and moved to 40.82 into April.
