Lean hog futures rose for the first time in four years in
2016, and by 10.6% - the strongest increase for a calendar year since 2010.
These outcomes looked most unlikely in October, when futures
touched 40.70 cents a pound, the lowest for a Chicago spot contract in 14
However, the strong demand for pork spurred as weak hog
values were passed through encouraged a strong (63%) revival in prices from
that October low to the end of the year.
Will this recovery continue in 2017? Or will the rally off
demand and sow the seed of its own destruction? Leading commentators give their
With 2016 already in the books we are looking ahead at the new
year and pondering some of the factors that could drive livestock markets.
Meat demand/consumer preferences:
We think there has been a shift in the way in which US consumers approach meat protein. Fat
is no longer taboo. The industry is no longer trying to eliminate all traces of
fat from its products at the detriment of flavour.
incomes are increasing at a faster pace, unemployment is down to prerecession levels,
and consumers feel more wealthy thanks to higher home values and equity
With a hard-fought election battle behind us, we think the consumer also
feels a bit more relaxed. Prices at retail have been slowly adjusting lower
and, in time,
this should expand protein availability and accessibility for US consumers.
International trade/dollar: Over 20% of all US pork currently goes to export
The strong US dollar generally is negative for exports
but by far the most significant negative impact is from non‐tariff trade barriers. This is a fancy way of saying some nations will
look to raise barriers in order to protect special interests within their
Productivity/disease pressures: Hog producers have benefited from
the gains in productivity
(more pigs per litter,
more farrowings per sow) the last couple of years.
Disease pressures have subsided. Will they continue to
enjoy similar success in 2017?
Looking ahead to 2017, the timing of anticipated capacity expansion
in the US – which is currently on schedule – will be critical in order to avoid
additional pressure on hog prices and producer margins.
Chinese pork production declined by 5-6% in 2016 and we only
expect a modest production recovery in the second half of 2017. Overall, 2017
production is expected to rise by 2-3%.
Prospects for the European Union in 2017 are soft, due to
strong export competition in Asia and the weaker British pound, which pressures
returns for European producers.
Our base case calls for a 2.5% increase in US pork
production. This is offset by 5% growth in US exports, largely driven by Asia.
Hog prices look to average at a similar level to 2016, but
with a far weaker start to the year offset by a stronger finish.
While hogs and pork production in the US continue to expand,
slaughter and pork consumption has expanded at an even faster pace since 2014
due to pork's relative attractiveness versus beef. The beef/pork ratio is still
in favour of pork consumption.
Societe Generale forecasts for Chicago lean hog futures
Q1 2017: 53.0 cents a pound
Q2 2017: 70.0 cents a pound
Q3 2017: 66.0 cents a pound
Q4 2017: 58.0 cents a pound
Forecasts on quarter-average basis
US per capita pork consumption has also recovered since
2014, reaching an average level of 66.2 pounds per person. During 2017, the
hogs ending stock-to-slaughter ratio should be circa 58%, slightly below the 10-year
average of 59%.
Hogs have a shorter production cycle (four-five months) than
cattle (nine months). Hence, the supply side response to a major price increase
should be faster than for cattle.
We believe that higher cattle prices can support hog prices,
as demand for pork is likely to remain strong.
US pork production has increased steadily since 1986, except
for a fairly flat period from 2008 through 2014.
Production is expected to increase from 25.0bn pounds in
2016 to 25.8 billion pounds in 2017. Exports are expected to increase from 5.2bn
pounds to 5.4bn pounds while imports are expected to stabilise near 1.1bn
Domestic pork supplies are projected at 51.0 pounds per
capita in 2017, up from 49.9 pounds in 2016 and 49.7 pounds in 2015.
The average price of hogs was near $50 in 2015 and about
$45.50 in 2016. An average near $40 is expected for 2017, with highest prices
in the last half of the year.