In a May 31, 2023, Barchart article, I highlighted the meat futures sector at the start of the 2023 grilling season. Live and feeder cattle futures prices were on the way to record peaks, but lean hog futures were sitting at 81.05 cents per pound. In that article, I pointed out the USDA increased cattle price forecasts but lowered hog price projections because of a glut of pork supplies.
Over the past month, lean hog futures moved to over 90 cents per pound as seasonality likely ate away at the glut.
A rally in lean hog futures
The CME’s August lean hog futures reached a 73.475 cents per pound low on May 24. Since then, pork futures have made higher lows and higher highs.
The chart highlights the bullish price action that took lean hogs for August delivery 27.7% higher to 93.825 cents on June 22. At over 90 cents per pound on June 27, the hog futures remain in a bullish trend.
The oversupply, increased regulation, and production costs rise
According to a May 26, 2023, Wall Street Journal article, “Years of rapid expansion have left the $54 billion U.S. pork industry oversupplied as demand wanes, costs rise, and new regulations loom, according to meatpackers and farmers.”
Demand has not kept pace with the significant supply increases. Since the war in Ukraine impacted supplies from Europe’s breadbasket feed costs have increased as grain and other agricultural product prices have increased. Meanwhile, the U.S. Supreme Court recently upheld California’s law forbidding the in-state sale of whole pork meat that comes from breeding pigs in a “confined and cruel manner.” Feed prices and regulations have increased pork production costs, and the recent low prices have caused pork producers to lose money on raising the animals.
Meanwhile, in any commodity market, the cure for low prices is low prices, as producers tend to reduce output, turning gluts into deficits. In the lean hog market, we could see a shift caused by reduced demand, higher feed costs, and the Supreme Court’s regulatory ruling. Higher pork prices and lean hog futures could be on the horizon.
Hogs could test the $1 level
The longer-term trend in lean hog futures since the April 2020 is bullish.
The chart illustrates the rally from 37.0 cents per pound in April 2020, the lowest price since September 2002, to $1.22725 in June 2021. In August 2022, the continuous lean hog futures contract made a slightly lower $1.22575 high before correcting to 71.50 cents in April 2023. The April 2023 high was marginally higher than the seasonal December 2021 70.20 cents low.
The recent spike from below 80 cents in May 2023 to over 90 cents per pound could cause the price to test the $1 level as technical resistance in the volatile lean hogs futures arena remains above the $1.20 level.
A slight change in the USDA hog forecast in the June WASDE- The forward curve tells a story
The USDA’s June World Agricultural Supply and Demand Estimates Report told the hog market, “Pork production is lowered slightly for the second quarter on a more rapid pace of slaughter but lower carcass weights.” The USDA raised its hog price for the second quarter but made no changes for the deferred quarters. The June report was more favorable for prices than the May WASDE report.
Meanwhile, the forward curve for lean hog futures is in a nearby backwardation.
The forward curve reflects the seasonality, with prices at nearly 94 cents for nearby July delivery. While August prices are slightly lower, they decline to below 80 cents per pound for October and December 2023 delivery months.
Meanwhile, the curve moves into contango (higher prices for deferred delivery), peaking at 96.80 cents per pound in June 2024 as the factors creating the current pork glut will likely cause supplies to drop and prices to rise as the market moves towards the 2024 peak demand season during next summer.
Expect a peak over the coming months and a decline into the fall
The 2023 grilling season began on the Memorial Day weekend in late May and will run through September, with the official end during the Labor Day weekend holiday. Grills tend to roll back into storage in the fall, causing the demand for pork, beef, and other animal proteins to decline. However, producers tend to cut back on production as the peak season approaches, causing supplies to drop as demand wanes.
Seasonality is the reason to expect a peak in lean hog futures during July and August and a correction in September and October, leading to price weakness for the nearby futures contract as the 2023/2024 winter approaches.
The current trend is higher, and lean hog futures could test the $1 per pound level over the coming weeks. However, the current supply glut will likely preclude a move much above the $1 level. Lean hog bulls will probably need to wait until the peak season in 2024 for pig futures to fly again and challenge the technical resistance above the $1.20 per pound level.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
