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Lean hog futures - can they extend their remarkable rally in 2017?

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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 years.

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 views.

Paragon Economics, Steiner Consulting

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.

Economy/incomes: Consumer 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 markets.

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 markets.

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 borders.

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?

Rabobank

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.

Societe Generale

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. Array

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

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.

University of Illinois

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 pounds.

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.

By Mike Verdin

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