Most hog producers continue to bleed red ink as December closes out, losses are expected to continue through the first quarter, but the market projects positive margins heading into both the second and third quarters of 2019. Hopefully, the new year will mean better financial opportunities.
The swine industry has been negatively impacted by the timing of retaliatory tariffs placed on the U.S. pork exports. Buyers such as Mexico and China came at a time when hog supplies and pork production were beginning to increase.
The current trade truce between the United States and China allows time for negotiators to reach a broader agreement. By March 1, keeping hope alive that tariffs on U.S. pork will eventually be lifted. However, there is no guarantee that a deal can be struck on such a short timeline. Despite the uncertainty, the market is optimistic over demand prospects next year as summer hog futures are trading at record premiums relative to the current CME Lean Hog cash index for this time of year.
The latest quarterly Hogs and Pigs report from the USDA does add some optimism from a supply standpoint given the smaller-than-expected inventory of lightweight pigs that will come to marked in late-spring, although there is still quite a bit of risk premium reflected in the summer months future prices.
Expectations for demand despite the increase in production we are seeing. In the most recent December World Agricultural Supply and Demand Estimates, the USDA increased their projection for 2019 pork exports by 250 million pounds to 6.45 billion. Strong global demand for U.S. pork was behind the revision, with China likely to be a big player in the market next year given their ongoing struggles with African Swine Fever.
We see implied volatility in the market which has made it more expensive to purchase options and hedge against market risk in forward periods. Implied volatility provides an objective measure of an option’s cost; this volatility means that one is buying an inflated asset when purchasing options to protect against adverse price changes. This challenge presents to risk management decisions in the current environment as most producers will want to initiate flexible strategies that retain the opportunity to participate in higher prices.
The reason for the volatility of course, is that the market is concerned of the possibility of a large rally should China enter the market and purchase large quantities of pork over the medium to longer term. This is certainly possible if a trade deal is reached given their ongoing struggle with ASF, it is important to keep in mind that deferred hog futures are already reflecting expectations for a very strong demand next summer give the premium to spot cash prices.
Swine producers face uncertainties in 2019 and will need to be creative when finding ways to manage their risks without leaving too much on the table. The new year brings both hope and fear.View News