Hog Prices Join Corn and Wheat at Ten-Year Lows

Focusing on lean hog futures prices, the low this fall was on the October 2016 contract at $40.70. The previous time lean hog futures had been this low was in October of 2002. This means lean hog futures in the fall of 2016 were the lowest lead contract price in 14 years. Lean hog futures have recovered somewhat since October, with the lead contract currently trading around $50, a level that is at the lower end of the ten-year range. Cash prices also reflect these multi-year lows. Live prices of hogs for 51 percent to 52 percent carcasses are expected to average about $36.25 in the final quarter of this year. This will be the lowest fourth quarter price since 2002, the lowest cash prices in 14 years, the same as lean hog futures. The current quarter is shaping up to have the worst losses since the first quarter of 2008 when cash corn prices moved above $4 per bushel after many years around $2.A three percent increase in this quarter's pork production is one of the forces keeping prices low, but shortages of packer capacity seems to be another factor that is an additional downward force on low farm prices. Over time, the pork industry growth has reached a point where more packer capacity is needed. In addition, the largest hog supplies of the year tend to be in the final quarter, which puts added seasonal pressure on capacity. It is generally thought that 2.5 million head per week is near federal inspection capacity. In four of the past seven weeks, the number of head processed at federal inspected plants has been above 2.5 million head.When there is a shortage of capacity in any industry there tends to be high returns to those who own that capacity. That seems to be the case this fall as the farm-to-wholesale margin is at record high levels. Looking at the most recent USDA data, the farm-to-wholesale margin for January through October has averaged $0.68 per retail pound this year compared to $0.56 per retail pound for the same period in 2015. If all of this higher margin were bid into the farm level price it would increase live hog prices by $5 to $7 per live hundredweight.After prices average about $36 for the final quarter of 2016, prices are expected to improve to about $40 for the first quarter of 2017 with head counts that are a little smaller. Then, seasonally smaller supplies in the second and third quarters could support live hog prices around $50.