December 1, 2008

Winter holidays might not raise ghost of US hog-crash past


US cash hogs and pork futures prices may come under pressure during the winter holidays partly because of the global financial fiasco but not to the extent they did 10 years ago when hog values plunged to depression-era lows.


US hog producers in 1998 had little to be thankful for heading into Thanksgiving and as they rang in the New Year.


The Asian economic fallout dented US pork demand, and the US pork industry was swamped with Canadian hogs. This was also at a time when one of this country's largest pork processors closed, which strained U.S. slaughter capability.


As a result, U.S. hog prices fell to just under US$10 per hundredweight on a live-equivalent basis in December compared with a weekly average high for the year at US$45.35. The dire circumstances were reflected in Chicago Mercantile Exchange hog futures that sank accordingly.


Fast-forward to 2008. A few market watchers fear that some of the same threats that hobbled the pork industry a decade ago are taking shape during the waning months of this year.


"I'm bearish hogs because we're running into some of the same problems that we had in 1998," a veteran hog futures trader said. "The economy is on its last leg, hogs are still coming in from Canada, and three holidays in row this winter are going to put our capacity in a bind."


More seeds for a potential hog-market winter of discontent were planted last summer. Back then, widespread flooding in the Midwest in June catapulted CBOT corn to record highs near US$8 per bushel. But CBOT corn later receded to its current price of around US$3.50.


Since corn is the main ingredient in cattle and hog rations, it is widely held that high feed costs erode producer profits. That could ultimately lead to fewer animals and higher cash hog prices. However, the reverse theory holds true in the event corn prices fall.


When corn prices topped out in June, spot-December CME hogs peaked at 79.15 cents a pound, a far cry from the contract's 58.67-cents Wednesday settlement. The lean-hogs price downward spiral was also blamed on funds that dumped long commodities positions - most notably crude oil and grains - as the world financial structure imploded.


Winter hogs seen down but not out


Tom Cawthorne, an R.J. O'Brien hog trader, said he feels that some cash hog and futures price pressure is likely in the coming months because of export demand issues tied to the global economic breakdown. But because of the change in industry structure over the past 10 years, he doesn't expect the US pork industry to suffer the same fate as in 1998.


"Back then, you had a lot of small mom-and-pop producers getting forced out," said Cawthorne. "Now, hogs are in the hands of large integrated packers who don't want hog prices to get too low."


University of Missouri livestock economist Glenn Grimes agrees that U.S. pork exports could take a hit this winter, primarily because slack demand brought on by world economic pressures. Grimes also said the prospect for a fourth-quarter hog-market meltdown on the order of a decade ago is "near zero."


Foremost, said Grimes, Canadian hog imports have dropped significantly this year compared with the late 1990s because of the U.S. dollar's recent strength against Canada's currency. Canadian pork producers also cut production due to high feed costs there, he said.


And some U.S. processors are accepting only hogs raised in this country following the implementation of Country of Origin Labeling in recent months, said Grimes.


Canadian hog imports in September 2008 totalled 185,521 compared with 267,463 in September a year ago and 220,000 in December 1998, according to Grimes.


Furthermore, Grimes said, US hog-kill capacity and efficiency have improved greatly, compared with 1998, after the Triumph Foods plant in St. Joseph, Mo., began operating two shifts in the fall of 2006.


"If we get through the Thanksgiving holiday without any real problems, I think we'll be home free," said Grimes. "The industry has figured out how to push more hogs each day through the same concrete and steel."


Grimes predicts carcass-basis hog prices during the last three months of 2008 to average US$54 to US$56 per hundredweight, with a futures equivalent around US$2 below that. Last year fourth quarter cash prices in the western corn belt averaged about US$53.18.


Post-Thanksgiving, Pre-Christmas Period Crucial


Dan Vaught, analyst with Wachovia Securities, also isn't anticipating "a major crash" in the hog sector this winter. Vaught isn't optimistic, however, about the hog outlook for the next six to eight weeks because of falling ham prices since the summer and diminished pork loin interest in recent years.


Vaught said that in past years, the traditional breakdown in ham prices occurred about two weeks before Christmas, accompanied by a huge surge in loin demand that would push up the hog market. But in recent years, he said, that has not been typically the case, partly because of changing consumer tastes.


Vaught also anticipates less pork interest from China, which has built up its domestic hog production in the wake of the mid-2007 price spike. He said China has also significantly cut back US pork purchases after the conclusion of the Olympics.


As for US hog slaughter rates, Vaught said kills have actually decreased during the past four weeks compared with a year ago because of Thanksgiving's arrival a week later this year than in 2007.


Nevertheless, Vaught expects slaughter rates to rise during the first part of December due to a seasonal supply peak and only three full kill weeks between Thanksgiving and Christmas. That, he said, should lend to general weakness in hogs and pork prices this time of year.


"I would not be surprised to see CME's lean hog index dip under US$50 per hundredweight," said Vaught. "How far under that low or how long it might spend there is left open to question.

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