The typical seasonal decline in hog prices into November stems from the normal production cycle as pork production normally increases by 400 million to 500 million pounds from the third quarter to the 4th quarter of the year. Traders see a steeper than average decline this year as pork production is expected to increase by 740 million pounds, which would be the second highest on record. The largest increase occurred in 2007 and December hogs that year reached a contract high of 74.72 in early August and pushed to a contract low of 50.65 on November 19th. One of the smaller increases in production occurred in 2009 and December hogs put in a contract low on August 18th and recovered into the end of the year. The data suggests that the market could remain in a downtrend into November and the production "increase" could be even higher than the USDA estimate if producers cull herds.
October hogs traded slightly lower early yesterday but managed to climb off session lows and close in positive territory. Early pressure was linked to weaker cash hog and wholesale pork prices but support was found from a sharply lower US Dollar. Uncertainty as to where grain markets are heading following this week's USDA report also limited gains.
Traders cited an increase in hogs coming to the market to avoid high feed costs as a reason for the weaker tone early yesterday. However, average weights do not confirm this idea as weights are running well above last year and the 5-year average. With high-priced feed grain, traders have been expecting weights to drop to well below normal due to the finishing costs, but this has yet to occur.
The CME Lean Hog Index as of September 11th came in at 70.17, down 98 from the previous session and down from 77.29 the week before. This leaves October hogs at a 340 point premium to the cash market. October normally trades at a slight discount to the cash at this time of the year.
Iowa/Minnesota cash markets were lower for 12 sessions in a row and closed up 58 cents yesterday to $63.91, and this helped provide some support.
The estimated hog slaughter came in at 433,000 head yesterday. This brings the total for the week so far to 1.740 million head, up from 1.306 million last week at this time and up 46,000 head from last year.
Pork cutout values, released after the close yesterday, came in at $77.48, up 2 cents from Wednesday but down from $78.56 the previous week. Wednesday pork values were the lowest since April 27th. Actual US pork production for the week ending September 1st came in at 458.5 million pounds, up from 457.6 the previous week and up 8.26% from a year ago. Slaughter that same week was up 7.3% but weights are higher than normal.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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