HE: Upside Potential on Pork Prices with New Hog Cycle Underway, By Jim W. Huang, CFA

CME: Lean Hog (HE)

Throughout 2023, U.S. grocery shoppers find that beef prices rise rapidly. According to the National Daily Cattle and Beef report, published by the U.S. Department of Agriculture (USDA), Choice Beef averaged $290 per cwt (100 pounds) on December 8th. This represents a 16% increase year-over-year and is 21% above the 5-year average.

In the futures market, CME Live Cattle ($LE) hit bottom at $85 per cwt in April 2020 during the pandemic lockdown period. Since then, cattle prices have trended up in a straight line to top $185 by this September, before pulling back recently in Q4. Beef prices have more than doubled, while the official reading of CPI for Food and Beverage went up by only 27% in the past five years.

Fortunately, you could still find low-cost meats if you walk over to the Pork section. Based on the USDA National Daily Hog and Pork report, Hog Carcass averaged $60 per cwt last Friday. It is a whopping 29% discount comparing to the $85 price tag on the same day last year. Ham price averaged $84, which is $10 cheaper than the same period last year.

In the futures market, CME Lean Hog ($HE) tends to move up and down in a cycle averaged 2-3 years. This phenomenon is referred to as “Hog Price Cycle” or “Hog Cycle” in agricultural economics. Pork prices do not appear to be impacted by the inflation.

The Hog Cycle

Hog cycles are the changes recurring in agriculture in the production and prices. A complete hog cycle includes successive years of increase and decrease in hog production cycle. In general, higher level of hog inventory will result in pork supply surplus, and cause hog and pork prices to fall in future months. Lower hog stock leads to pork supply shortage and will cause prices to rise.

There is a mismatch between hog production cycle and hog price cycle, because it takes time to produce hogs, from farrow to weaned pig, and from feeder pig to market pig. To complete a feedback loop, a producer first observes change in market prices, he then adjust production level accordingly. It will be 5-6 months later before the change in hog output occurs. We could describe the sequence of events in the following:

  • As producers incur loss from low price, they liquidate sows and reduce hog inventories.
  • A lower level of hog production results in a shortage of pork supply (months later).
  • Pork price goes up as supply could not meet demand.
  • Higher hog price induces producers to raise hog inventory.
  • Higher hog production results in a surplus of pork supply (months later).
  • Hog price declines due to the oversupply of pork in the market.

Sow Liquidation Could Lead to Lower Hog Supply in 2024

Iowa State University (ISU) is a leading authority in swine research. Based on the estimates put out by ISU Economics Department, a typical Farrow-to-Finish hog producer in the U.S. would have incurred losses in ten out of the last twelve months.

As shown in the table below, a producer farrowed in September 2022 would pay $129.15 in feed cost and $71.90 in nonfeed cost per hog. When he sold the hog with an average weight of 270 pounds in April 2023, he would receive $148.83 and a manure credit of $8.50, resulting in a net loss of $49.47. These steep losses average $21 per month from November 2022 to October 2023. Hog farmers may be forced to liquidate sows this winter. It could result in lower hog inventory and lower pork supply in the coming months.

In the 2023 September Quarterly Hogs and Pigs Report, the USDA estimated that U.S. inventory of all hogs and pigs was 74.3 million heads. This was up slightly YOY, and up 2% Q2, 2023.

The new quarterly report will be released in two weeks. The updated data would help us validate whether sow liquidation has increased as we hypothesize.

USMEF Export Data

The U.S. Meat Export Federation (USMEF) recently posted export data for October. U.S. pork exports posted another strong performance, led by record-large shipments to Mexico and broad-based growth elsewhere. October beef exports remained well below last year’s large totals but improved from September.

October pork exports totaled 245,345 metric tons (mt), up 3% YOY as the largest since June, valued at $688.2 million. For the first 10 months of 2023, pork exports increased 9% YOY to 2.38 million mt, with value up 6% to $6.66 billion.

In my opinion, the sharp decline in hog prices increases the competitiveness of U.S. pork around the world, fueling the export boom.


The U.S. futures market regulator CFTC publishes the Commitments of Traders (COT) reports and provides a breakdown of open interest for futures and options markets. What’s the key takeaway from the December 5th COT report on CME leaned hog?

Weekly CFTC data showed the lean hog speculative traders were closing longs and adding shorts during the week that ended 12/5. That left the funds with a 3.4k contract stronger net short of 17,963. This may be a bearish signal. However, speculative traders may have incurred large losses on the long positions, and they simply took cover.

Trading Opportunity with Lean Hog Futures

To sum up the above analysis, I expect to see lower hog supply due to sow liquidation in the coming months. This will usher a new hog cycle.

With a strong labor market and cooling inflation, particularly lower gasoline prices, we could see some improvement in consumer demand for pork. A strong export market reduces supply suplus in the domestic market, which also helps lift pork prices.

The April 2024 lean hog futures (HEJ4) was settled at $74.625 last Friday. Each contract has a notional value of 40,000 pounds, or $29,850 at current price. To acquire 1 long or short position, a trader is required to deposit an initial margin of $1,500.

The trader could see higher hog prices if sow liquidation speeds up, and the export market remains strong. A long position would profit from the rise in hog price. Each contract would gain $400 for every 1 penny of increase in hog price per pound.

On the other hand, hog prices could stay low if the opposite happens.

Happy Trading.


*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.

CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs  https://www.tradingview.com/cme/