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"Some had feared that the recent drop
in prices was a sign that the 'big break' in hog prices had
begun," said Chris Hurt. "That is not likely to happen."
Hurt's comments came as he reviewed
recent actions in the hog market, which saw the first crack in
bullish sentiment in May as hog futures prices declined. July lean
hog futures, for example, had a May high of $79.20 on May 2 but
dropped to a low near $71 on May 20.
"Cash hog prices have tumbled as
well from carcass highs near $80 during the first week of May to
below $72," said Hurt. "Now the question is, 'Can hog prices hold
on?'"
Hurt reviewed the supply and price
situation so far this year. Pork supplies have been nearly
unchanged, with about 1 percent fewer hogs coming to market.
However, prices have performed admirably, averaging about $52.60
(live weight), 10 percent higher than during the same period last
year.
"Such strong price performance in
light of unchanged supplies reveals the continued strength of pork
demand," he noted. "The demand components this year include strong
exports, given continued restrictions on U.S. beef exports;
record-high beef prices, which are causing some shift to pork
consumption; narrow pork margins; and favorable consumer incomes
and attitudes regarding meat consumption."
Pork supplies for the remainder of
the year are expected to move above year-previous levels by about
1 percent, he added.
"While this is not a major
deterrent to continued high hog prices, it does cast a possible
bearish shadow, at least from the level of $80 summer futures
prices," Hurt said. "A second supply concern is that more breeding
herd expansion is likely to be revealed in the USDA's June hogs
and pigs report, to be released June 24."
The strongest evidence of
expansion comes from the low rate of sow slaughter since last
December. Slaughter was down about 8 percent relative to the same
time period a year earlier. The March report showed no increase in
the breeding herd, but the possibility of a 1 percent to 2 percent
increase appears possible for the June update.
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"Producers had indicated their
intentions to farrow 1 percent fewer sows this summer, and signs of
expansion in the June report may mean these numbers will be somewhat
higher," said Hurt.
From a domestic production
standpoint, a very modest increase in supplies may be expected in
the last half of the year relative to expectations a few months ago.
In terms of live hog imports from Canada, so far this year, imports
of market hogs are down about 20 percent and imports of pigs for
finishing are down around 12 percent.
"Given the strength of the Canadian
dollar, the flow of pigs coming from Canada is expected to remain
below year-previous levels," said Hurt. "This is another supply
fundamental that does not favor a major break in hog prices.
"For now, pork demand components
remain favorable as well. Little progress is expected in opening the
Canadian border to live cattle imports that might lower U.S. retail
beef prices, and resumption of beef exports to Asian countries
remains mired in uncertainty."
Consumers, Hurt added, seem to have
a strong desire for meat, and personal incomes are expected to
continue to expand, although at a somewhat slower rate than last
year. Finally, pork marketing margins remained narrow in the first
quarter of 2005.
"It appears that the answer to 'Can
May prices hold on?' is yes," said Hurt. "So, 'Can hog prices hold
on?' I think the answer is also yes. Summer futures markets probably
just got too optimistic. Live-weight prices are expected to average
in the mid-$50s during the second quarter, with third quarter prices
dropping back into the lower $50s.
"Futures markets for the fall
currently are suggesting live prices in the low to mid-$40s and are
likely building in too many bearish uncertainties. A more reasonable
forecast is for live prices to be in the mid- to higher $40s during
the fall. In a similar fashion, lean hog futures for early 2006
appear to be underpricing the fundamentals by several dollars per
hundredweight."
[University of Illinois news
release]
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