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Hog outlook to get worse before it gets better

The recent slump in nearby hog values may only mark the beginning of a season of pain for pork producers.

Already-high feed costs look set to keep climbing just as hog values enter their traditional seasonal soft patch, which may place hog production margins under even more pressure. To make matters worse, inventories of pork remain well above average in cold storage facilities across the U.S.

Although the price of soymeal — a key ingredient in nearly all hog feed rations — has been on an upward tear all year, the values of other key feeds such as corn, feed-grade wheat and distillers dried grains (DDGs) largely moved sideways for the first five months of the year. Indeed, for most of the first four months of the year lean hog prices outperformed corn and wheat prices to give many savvy hog producers plenty of profit potential. That encouraged hog farmers to increase production, but rising output weighed on pork cutout levels — a measure of the value of the hog’s edible components.

About turn

Things changed drastically beginning in late June. Drought slashed corn and soy production, while prices for DDGs soared more than 25 per cent. Hog producers responded by bringing their animals to market as early as possible, which pushed up pork supply.

But much more aggressive herd liquidation may be needed as the overall U.S. herd size remains close to multi-year highs. Moreover, a majority of production capacity is centred on a few deep-pocketed corporations which can withstand long periods of negative margins in order to gain market share.

In addition, there remains a huge overhang of pork supplies that will need to be chewed through before there is any realistic hope that a scarcity of supplies will bring about a sustained upturn in pork prices.

And all this is occurring at the dawn of the seasonal softening in lean hog prices, brought about by a rise in hog weights as pig appetites recover from heat-stunted summer diets. This year’s price softness could be exacerbated by the additional pork brought to market as a result of the sow slaughter currently underway that will eventually reduce overall U.S. pork production capacity but could bring about a further deterioration in hog market sentiment over the near term.

So while the recent heavy slump in hog prices may suggest that this market has already adjusted to the challenging feed and pork price outlook, things could actually still get worse before they get better.

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