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Can lean hog futures record a third successive year of gains in 2018?

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Lean hogs were one of the few agricultural commodities to post a second successive year of gains in 2017.

 

(That said, futures have yet to come anywhere near regaining the highs above 130 cents a pound reached in 2014.)

 

Worries around at the end of 2016 - that demand would prove insufficient to absorb extra supplies springing from a growing US herd – were assuaged by decent US domestic demand, helped by two large processing plant openings in September, and unexpectedly strong exports.

 

But will the market make a third successive year of headway? Or will pork output – seen by US officials as rising again this year, by more than 1.3bn pounds to 26.0bn pounds – bring the price recovery to an end?

 

Leading commentators give their views.

 

 

Mike McGlone, senior commodity strategist, Bloomberg Intelligence

“A cyclical recovery appears to be emerging for livestock prices.

 

“Similar to 2009, the 52-week moving average looks to have bottomed. There are two key differences this time - the aftermath of a prolonged downturn, and a favourable shift in futures curves.

 

“Indicating demand that exceeds supply, the average of one-year live cattle and lean hogs curves is 5.6% in backwardation.

 

“The 52-week mean appears to be turning higher, catching up with the same mean on the one-year futures curve.”

 

 

Goldman Sachs

“Given the increasing strength of US supply, we continue to believe strong export demand will remain critical to pricing going forward.

 

“Recent export data has shown year-over-year growth softening. However, on a sequential basis growth remains more resilient.

 

“We also continue to expect incremental demand for hogs from ramp-up of new slaughter capacity.

 

“However, on balance we continue to see supply growth to outweigh demand and keep downward pressure on prices into 2018.

 

“We maintain our forecasts at 65, 70 and 60 cents a pound for 3, 6 and 12 months.”

 

 

Chris Hurt, Department of Agricultural Economics, Purdue University

“The theme for the pork market in 2017 was higher production and higher prices when pork production rose by 2.5% and hog prices were up 10%.

 

“The reason was strong pork demand around the world.

 

“For 2018, we once again ask if hog prices can be higher with a 3.5% increase in supply and with sizable increases in competitive meats as well. The lean hog futures market is currently saying, “yes”!

 

“Why might the futures market be correct? The foundation of the argument lies with demand.

 

“In 2018, the US economy will grow more rapidly. The world economy is expected to be the strongest since the 2008-09 recession.

 

“USDA analysts expect net pork trade (exports minus imports) to increase by 9%. Packer demand will continue to strengthen as newly opened processing plants continue to expand toward full capacity in 2018.”

 

 

Rabobank

“The increase in US slaughter capacity recorded in 2017 will allow the industry to meet robust domestic demand and continued high US exports.

 

“The recent strength in US domestic demand should carry into 2018, as pork remains an important traffic driver in a highly competitive retail market, while foodservice demand for bellies also remains strong.

 

“We expect US exports to rise 3.7% in 2018, reflecting high demand in the key destinations of Mexico, China and Japan.

 

“The new EU-Japan free trade agreement should have limited impact in 2018, but might negatively affect the competitiveness of US pork in its second largest export market (22% of total US pork exports by volume).

 

“Any change to Nafta could jeopardise trade with Mexico and Canada.”

 

Rabobank lean hog price forecasts for 2018
Q1 Q2 Q3 Q4
Chicago spot contract, quarter-average price 69 cents a pound 78 cents a pound 76 cents a pound 66 cents a pound

 

 

Societe Generale

“In the near term we are neutral/slightly bearish on lean hog prices, while for the period beyond six months, we are bearish because of: 1) concern over the strength of US pork demand; and 2) reduced exports to China where hog production might recover.

 

“If our greatest upside price risk prevails (US per capita pork consumption grows by more than 1% in 2018 and weak recovery in hog production in China), we could see lean hog prices move into the 67-70 cents-a-pound range.

 

“Should the greatest downside risk prevail, they could move into the 55-60 cents-a-pound range.

 

“Hog slaughter rates have improved in recent weeks amid commissioning of new slaughtering capacity and should improve further in 2018 as more capacity becomes operational.

 

“This should increase the demand for hogs and improve pork supply.

 

“The USDA expects China’s breeding hogs (sows) inventory to increase by 2% in 2018, the first increase since 2013. Weaker-than-expected US exports are a key risk for US pork and hog prices in 2018 amid expectations of a recovery in China’s hog herd.”

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