Hedge Now Before Pork Supply Avalanche Sets In

Hog slaughter for the week came to 2.215 million head, according to USDA's weekly packer survey. That comes with only 412,000 head for today and 21,000 for Saturday. It was under our 2.227 estimate. Smaller than expected supplies, at the time of year with the smallest supplies anyway, is clearly positive.

This week's run is 1.7% over last year. The previous six weeks averaged 2.9% over. Pork production of 470.4 million lbs. was estimated. That would be 3.8% over last year, over the past six weeks of +2.7%. We would suggest this estimate is simply too large. For the pork production estimate, USDA uses the packer slaughter numbers and includes their own estimate of weights. The most recent estimate of weights from yesterday showed they were only +1.0% over last year. We are in the last phases of the tightening supply picture for the year. Once July rolls around we have some terrible supplies to work through the rest of the year.

This week was another win for bulls. It was not a major win but anything over zero is gladly welcomed. July closed up 1.12 for the week and August gained 1.35. August now has the larger open interest numbers and is therefore the dominant contract. The back months have been a focus of ours in recent weeks. We are at the year's lows in offered supplies and many would suggest this "should be" the best price for fall/winter hedging. October was -0.07 while December ended -1.15.

The lean hog index, for hogs traded to packers through Thursday., will be at 81.44. July futures, which expire on July 16, settled at 81.72. We may see a couple weeks left of cash hog gains but once July rolls around we will be right back to this price and headed the way down.

The Canadian foreign minister suggested NAFTA negotiators will be meeting over the summer, although no meetings are currently scheduled. As Mexico already has their pork tariff on U.S. product done, this is no longer a scary unknown issue for the U.S. pork market to chew on. As a minor heads up, Mexico's farm lobby is suggesting there is talk about a step two retaliation against the US. This one would include corn and beans.

Yes, there will be a week or two up and a week or two down in July and August but the days of strong fundamentals support from declining supply is coming to an end. Hedgers need to sharpen the pencil because we may have work to do. Corn is cheap compared with likely supplies due to trade concerns. We have not yet gotten into the portion of the growing cycle that determines yields (pollination and kernel fill/finish). September options cover risk through August 24. Buying the September $3.80 call and selling the $3.40 put can be done for around 11 cents. Regarding the coming supply avalanche set for fall/winter...if we can get hedges on at breakevens we consider that a big victory. That opportunity is offered now. We don't have an official Q4 hedge out yet but will do so shortly.

Rich Nelson
Allendale Inc.
815-578-6161

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