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Lean hog futures - will an output slowdown revive prices in 2016?

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Lean hog futures were one of the worst performers among agricultural commodities last year, tumbling 26% as the country overcame a squeeze on US supplies from porcine epidemic diahorrea virus, or PEDv.

This when a strong dollar was enhancing the competitiveness of foreign supplies too.

US pork imports rose 10% last year to top 500,000 tonnes last year for the first time since 2005, according to the US Department of Agriculture.

Still, there were signs in the latest quarterly USDA data on the US hog herd that the pace of expansion was tailing off. Producers, for instance, said they intended to farrow 1.9% fewer sows in the December-to-February period than a year before.

Can lean hog futures build on signs of recovery late last year? Or does a fresh lurch lower in values await?

Darrel Good, Department of Agricultural and Consumer Economics, University of Illinois

"Livestock prices reached a peak in 2014 due to reduced production resulting from high feed prices… and disease in the US hog herd.

"Production is now rebounding and prices are declining. Demand is also somewhat weak due to slow economic growth and claims of health concerns associated with pork consumption.

"US pork production is expected to increase from 24.508bn pounds in 2015 to 24.925bn pounds in 2016.

"Exports are expected to increase from 5.0bn pounds to 5.2bn pounds, while imports decline modestly to 1bn pounds.

"Domestic pork supplies are projected at 49.7 pounds per capita in 2016, up from 49.5 pounds in 2015 and 46.4 pounds in 2014.

"The average price of hogs was near $76 per hundredweight ($0.76 per pound) in 2014. An average near $50 per hundredweight is expected for 2015 and near $48 per hundredweight in 2016, with highest prices in the first half of the year."

Goldman Sachs

"We have maintained a moderately bearish outlook on prices for most of [2015] due to two key factors - post-PEDv [porcine epidemic diahorrea virus] recovery in the US herd; and our foreign exchange strategists' strong conviction on US dollar strength, which would weigh on exports.

"We believe dollar strength, herd rebuilding and heavier slaughter weights will continue to put downside pressure on prices over the medium-term.

"Yet uncertainty remains as to how much of the recent decline is attributable to demand weakness."

Paragon Econmics, Steiner Consulting

"Hog and pork supplies are plentiful and this can be seen in the pricing of cash hogs (high $40s per hundredweight) and cash pork prices (cutout was down last week).

"It is not unusual for ham prices to be weak following the holidays but the value of loins and bellies also has been negatively impacted by the relatively large slaughter.

"For the moment market participants will pay close attention to slaughter rates and the potential impact on near term pork prices.

"News of a sharp decline in equities in China may be viewed as negative for US pork exports, especially as it concerns not just China pork demand but also global growth prospects and the value of the US dollar.

"Export demand remains a critical factor for pork prices in 2016 given expectations of expanding supplies of all three species [beef, chicken and pork]."

Rabobank

"US pork production saw recovery in 2015, after a porcine epidemic diahorrea (PEDv) epidemic late 2013/early 2014 depressed supply and drove prices to all-time highs.

"Supply has increased between 7-8%, and prices fell back to 25% below 2014 levels.

"Our base case [for prices] assumes 2016 US pork production in line with 2015 levels, as a slight decline in hog supply is offset by increased weights.

"This is slightly lower than the USDA forecast of 1.5% growth for 2016, and drives out bullish view on 2016 lean hog futures to breakeven levels."

By Agrimoney.com

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