Does the recent rally signal a fundamental shift in the hog market?
The increase in prices is a most welcome relief to what has been a terrible stretch for the pork production community. However, I tend to think that this is more of a correction to get markets aligned rather than an outright rally indication. I will cite two items from our esteemed economist, Dr. Steve Meyer. The first depicts the implied demand curves for wholesale pork and where we sit right now, this is a Dr. Meyer staple. There is good news in this data. First, we have moved the 2024 projection higher over the past six months as real demand has improved. Not to the nirvana of our 2021-2022 experience, but nicely off the well-trodden green line observations from 2010-2020. This shift allows profits to flow through the packer and into the producer – yes, we projecting a small profit in 2024, a welcome relief from the dismal 2023 showing.
The second chart is part and parcel to the first, as the futures market (represented by the green dots) has moved higher to meet the economic predictions for 2024. These two things are consistent with one another. As we have witnessed an outward shift of the demand curve, the futures market has recognized the change and has increased in value to reflect the more positive scenario. This is great news ... but let's not get too far in front of our skis and think we are on the cusp of significant run. Not yet. We will need to see a larger disparity to compel us to forecast an outright, unbridled rally in the market. This subtle shift we have experienced is welcome. Please note that the summer months have largely come inline with the flow, the fourth quarter has yet to respond with any significance and may be the place where opportunities still exist to be patient.
Was there anything notable at the Ag Outlook Forum?
Oh yes. The grain market had a bit of a rude awakening from the meeting last week. Now, this one is akin to attempting to rouse a slumbering teenager – the grain market has had several wakeup calls, the producer community would rather ignore the alarm and go back to their most pleasant dream as represented by the last four years of good (outstanding?) profits. It is time for the agronomic community to quit hitting the snooze button and face the new reality. Input prices for animal agriculture are moving lower and there is little on the horizon to stem the tide.
The numbers from the USDA were not all that shocking. Lower corn acres (91 million) and increased yield (181 bpa). Neither of these numbers are a surprise, just another dose of reality to the grain producer – your glory days are done. The grain markets had been trading at lower levels coming into the report, we touched on life-of-contract-lows this week as the hope of a reversal is tough to fathom. Funds are short a near record amount, the production community is long corn at a factor of about 10x the fund short.
Who wins this battle? I expect any upward movement in futures to be met with catch-up sales from the farm community that is woefully undersold and needs to reluctantly participate with more sales – sales that will cap any rally. The verbiage from the USDA indicates higher carryouts and lower prices for corn and soy, they anticipate a slight rebound in exports. But the U.S. is so uncompetitive right now (Ukrainian corn and Brazilian beans are dominating the offers) that prices will have to move significantly lower to witness and uptick in export shipments.
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