January 18, 2010

US hog market to tighten further on higher consumption

The US hog market is set for further tightening as rising American pork consumption and exports compete for supplies constrained by the lowest breeding sow numbers since at least the 1980s.

According to Goldman Sachs, however, Chicago prices for near-term contracts look fully-valued, with more distant futures representing better value, the investment bank signalled in a commodities report.

A revival of American demand was evident in the drawdown in pork stocks held in cold storage, which in the first 11 months of 2009 fell some 20%, and were continuing to decline in the winter, a period in which inventories often recover. Meanwhile, exports in October reached their highest level in a year.

"Domestic demand continues to recover despite rising wholesale pork prices," Goldman Sachs said, adding that it expected the trend to continue.

Herd reductions amid two years of huge losses for hog farmers were beginning to show, with US swine inventory falling 2% during the October-to-December period, and the number of breeding sows dropping to its lowest for at least 33 years.

However, this potential was most evident in distant contracts, with the price set to stand at about 80 cents a pound in a year's time, roughly 15% higher than that the futures market is pricing in.

A forecast for the price hitting 80 cents a pound in six months' time was only barely in the money, with the July contract standing at 78.75 cents a pound last week, and the August lot at 77.00 cents a pound.

The price of 65 cent a pound predicted for lean hogs in three months' time is below the 70 cents-plus a pound that the market is pricing in.

Hog prices have recovered more than 50% from an August nadir, when fears for the impact of economic crisis and the spread of so-called swine flu dragged prices nearly to 43 cents a pound.