Cautious U.S. Hog Herd Expansion Underway

Record-high hog prices and strong demand from overseas markets are spurring U.S. hog farmers to pursue production expansion opportunities.

But with global hog output expected to hit a record in 2011, producers need to be cautious about overexpansion – especially in the current environment of record-high input prices.

U.S. hog farmers have been faced with historically strong hog prices for the past several months, but have only recently shown signs of increasing hog output.

Keeping production levels constrained has been the volatile input price environment facing livestock farmers generally, especially with crucial hog feed ingredients such as corn and soymeal trading close to multi-year price highs.

However, the enduring price strength of recent weeks – even in the face of fresh price gains in markets such as corn – seems to have convinced hog producers to pick up the production pace as the second quarter of 2011 begins.

Two key metrics of hog farmer production intentions point to higher output levels down the road.

Firstly, the U.S. sow slaughter rate is off to its slowest average pace for the opening two months of a year in more than five years (March data is still not available.) While some of this reduction in sow slaughter can be attributed to lower sow imports from Canada, deliberate preservation of sows for herd expansion can also be assumed, and indeed is reflected in the expansion in the U.S. breeding herd size for three consecutive quarters to its highest level in more than a year.

Secondly, hog producers have recently built up a record-large short position in hog futures and options, which indicate a commensurately-sized long position in the cash hog market that those farmers are hedging using futures and options.

The combination of reduced sow slaughter and higher U.S. breeding herd size sets the stage for higher U.S. hog output in the months ahead.

While higher production may be a natural response to the prevailing high price environment, more hogs could serve to undermine this market’s fundamental appeal for some types of traders.

Speculative traders, in particular, may view the prospect of higher output as a reason to reduce long bias in the market, especially given that record-high meat prices can be expected to eat into demand over time.

The latest data released by the Commodity Futures Trading Commission reveals that the net position held by managed money traders is close to a record level, while commodity index traders have their highest long position in 2-1/2 years.

These long positions offer a mirror image of the growing short exposure of U.S. hog producers, and reveal a nearly unanimous bullish opinion on the hog market in recent weeks despite the significant challenges posed by record-high feed costs and rising meat prices at the grocery store.

In all, the recent stretch of record-high prices has started to spur production rises in the United States and other regions. But with global hog output already projected to be a record in 2011 thanks to aggressive output expansion in China and other regions, farmers need to be wary of adding too much extra supply at the present time given the unprecedented threat posed by surging feed costs and rising food costs globally.

Gavin Maguire is a Reuters market analyst.

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