Why Are U.S. Hog Producers Expanding?
By Dennis Smith
Follow me on Twitter @denniscattle
Tuesday August 20, 2019
Not only are hog prices moving higher in China but they’re moving higher in Europe as well. As we noted several times, the pork herd in the EU is NOT expanding. Herd size is actually down in Germany. Yet U.S. producers continue to expand. Why? Why not liquidate some breeding stock and enjoy profits for a solid year before expanding again? Futures were strong yesterday on volume of 37,400 with open interest down 3,600 cars. All of this was due to the open interest coming out of the expired Aug contract. So really open interest increased by 1,400 on the rally. Cash was lower and cutout was lower. Hams are pulling back but they’ll likely soon attract demand again. I’m hearing that packers are not overwhelmed with supply. They’re looking for hogs despite the lower cash yesterday. Futures seem to be anticipating this yesterday with the reversal upward in the wake of limit down on Friday. Resistance is clearly defined. No word on the possible outbreak of ASF in the Philippines.
The bad news is that the show list is substantially larger this week with carryover noted. The list is estimated to be 270,100 compared to 249,600 last week. The good news is the negotiated volume of trade last week, at just 54,000, was the smallest since the third week of February. In addition, packer margins are huge, approaching $400 per animal. So for this week one can envision that packers need to play ball, they need and certainly have the inventive to secure animals. Look for a fully steady to firm cash tone. A bit longer term, one must expect the beef to top and eventually packers will slow down the marketing pace more in line with slaughter capacity. I calculate that about 8,000 head were backed up last week. In this environment, one must expect and prepare for packers to eventually play hard ball, to cherry pick the show list, to break the cash steer market. On the rally yesterday we were actively purchasing Oct puts for both our hedge clients and our spec crowd.
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