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There's not just one issue with the hog market · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_00: Welcome to the Hog Market Talk Podcast.
• 0:05
  SPEAKER_00: Your weekly deep dive into hog market fundamentals, breaking news, and industry insights.
• 0:12
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:20
  SPEAKER_01: Today is October 8th.
• 0:22
  SPEAKER_01: I've got Pat here with us today.
• 0:24
  SPEAKER_01: How's it going, Pat?
• 0:25
  SPEAKER_01: I'm doing good.
• 0:25
  SPEAKER_01: How are you, Mike?
• 0:26
  SPEAKER_01: We are doing very good.
• 0:28
  SPEAKER_01: It's some nice, crisp fall weather finally in the Midwest.
• 0:32
  SPEAKER_01: A lot of soybean harvest is finally getting wrapped up as well.
• 0:35
  SPEAKER_01: But we are here to talk about the hog market today, Pat, which that's been a rough ride here lately, hasn't it?
• 0:41
  SPEAKER_02: Indeed it has.
• 0:42
  SPEAKER_02: And uh as we uh record this podcast on Thursday morning, uh a little bit before noon central time here, another day of uh of a little weaker markets.
• 0:53
  SPEAKER_01: A little weaker.
• 0:54
  SPEAKER_01: So let me explain this a little bit.
• 0:56
  SPEAKER_01: October hogs on the last month, we've taken off just over six dollars.
• 1:01
  SPEAKER_01: And on the summer contracts June next summer over the past month here, we've taken off just over about five and a half dollars, uh, around uh depending on where today's close comes in, Pat.
• 1:12
  SPEAKER_01: But this hog market would show that we've got the weakest index price since February today, and we've got the lowest cutout we've had since the end of 2023.
• 1:22
  SPEAKER_01: So I wanted to talk about what the actual problem is in this hog market today, or plural.
• 1:30
  SPEAKER_01: Right.
• 1:30
  SPEAKER_02: And so I uh um the the good news, Mike, is is that is that that isn't a simple answer, right?
• 1:37
  SPEAKER_02: I I um I I think when you start rattling off statistics like that and say you have the you know the the lowest cutout in in multiple years, um and and then on top of all of that from a seasonal perspective, we just went through a summer where we really didn't have a you know a summer hog market.
• 1:55
  SPEAKER_02: Um I I suspect that other times in in uh in our careers, my career, that that if we would have had this big of a sell-off, um and then and then for this sustained amount of time, it would have been pretty easy to point our finger to one thing that created this challenge or this problem.
• 2:17
  SPEAKER_02: One black swan.
• 2:19
  SPEAKER_02: Exactly.
• 2:19
  SPEAKER_02: And and uh certainly a very dark brown one or something, right?
• 2:23
  SPEAKER_02: Like something that that that would approach uh um uh catastrophic sort of concerns.
• 2:29
  SPEAKER_02: And and and so um because um we're unable to to uh uh attribute this to one factor, at least for the purposes of this discussion today, we're gonna interpret that as a good thing.
• 2:41
  SPEAKER_02: And so um prior to us uh um starting this recording, we were talking about uh um kind of the the holes in the Swiss cheese argument of uh you know, we've got multiple different challenges and they've sort of aligned themselves.
• 2:55
  SPEAKER_02: The holes in the Swiss cheese have lined up here and and started to create, you know, what definitely is a challenging situation, and then a futures market that is suggesting that it's just gonna get worse from here.
• 3:08
  SPEAKER_02: Uh you know, today's cutout uh again, a struggling number, um, you know, 81 uh 60 or so, and and uh with December hogs trading at 6850, something close to a normal discount from today's you know, spot fundamentals is what the futures market is trading for for the winter months here, and and so an awful lot of pessimism built it into this thing.
• 3:35
  SPEAKER_02: Um, you know, the the index funds, uh those guys are at record shorts, have been for an extended period of time.
• 3:42
  SPEAKER_02: Um they keep selling this thing, adding to it a little bit, and so far uh continue to be right.
• 3:48
  SPEAKER_02: And so again, while all of those things aren't good, are bad, if it was one thing that was creating this challenge, um I I I I think I think it that that'd be worse, if you will.
• 4:04
  SPEAKER_02: And and so um, so let's just talk a little bit, Mike, about what is going on today.
• 4:09
  SPEAKER_02: And I think at the at the top of this list would just be the time of year that we're in.
• 4:15
  SPEAKER_02: I mean, I the as I just described, the market is demonstrating an inverse product is going to be worth less tomorrow than what it is today.
• 4:23
  SPEAKER_02: That's a very common thing to occur from August 15th to December 15th or something like that, right?
• 4:30
  SPEAKER_02: So that's not a a a new observation, but if you experience softer demand during this time of year, it does it is compounded by the fact that there really isn't much of any desire to um have any product in cold storage, to put any more product into cold storage, and any product um that that's harvested and processed today needs to move today.
• 4:54
  SPEAKER_02: And so um and and in this year, from a supply-side perspective, we've had a slightly um larger than normal seasonal increase in supply.
• 5:04
  SPEAKER_02: That by itself is not a big deal at all, but it's one of the holes in the Swiss cheese.
• 5:08
  SPEAKER_02: And so that's um, I think that's one thing that's having an impact today.
• 5:12
  SPEAKER_02: Um, lately we've seen a bit of appreciation in the uh uh Mexican peso relative to the US dollar.
• 5:20
  SPEAKER_02: We've also had some cheap, cheaper ham primals that that would have been easier to clear out into that market with a little bit more of a favorable currency situation.
• 5:30
  SPEAKER_02: That too isn't by itself a huge deal, but it might be one of the holes in the Swiss cheese.
• 5:36
  SPEAKER_02: Um the uh a few extra loins around as we have this seasonal um uh move and and uh you know trying to move some of those into that that Japanese market and and their economy is is doing okay, but not great, right?
• 5:50
  SPEAKER_02: And so it might be just another hole in the Swiss cheese.
• 5:54
  SPEAKER_02: Um, you know, we've uh um up until um about two months ago, we the U.S.
• 6:04
  SPEAKER_02: uh market was needing to figure out a home for about two and a half percent more poultry production year over year.
• 6:13
  SPEAKER_02: And so we're asking a a U.S.
• 6:16
  SPEAKER_02: consumer, and that that I mean that's all concentrated to the domestic market, you know, we're asking the U.S.
• 6:22
  SPEAKER_02: consumer to consume more poultry this year than they did last year.
• 6:26
  SPEAKER_02: And I don't think that's helpful for pork demand today, right?
• 6:29
  SPEAKER_02: And so that's another um that's another hole in the in the Swiss cheese.
• 6:33
  SPEAKER_02: And so anyway, I just rattled off four of them, right?
• 6:36
  SPEAKER_02: And and there's more, right?
• 6:37
  SPEAKER_02: There's there's there's a lot of of different reasons why you know we're we're struggling a little bit today, and and when all of those things are happening at the same time, um, this is the result.
• 6:49
  SPEAKER_02: And so anyway, um when I try to describe it that way, um I I think it helps as it relates to just uh thinking about bigger picture sort of analysis on this market.
• 7:02
  SPEAKER_02: And one could be pessimistic about this interpretation too, right?
• 7:06
  SPEAKER_02: Well, now you've got six things to fix, Pat, instead of one.
• 7:09
  SPEAKER_02: I guess that's true, right?
• 7:11
  SPEAKER_02: But they're minor problems, not major ones, right?
• 7:13
  SPEAKER_02: And and and I think there is an opportunity, you know, as time passes here for for um all of those things to to to start to maybe fix themselves a little bit at different times, and we can get those uh those holes in the Swiss cheese to to stop being aligned with one another.
• 7:29
  SPEAKER_01: And the good news is historically low prices tend to cure low prices eventually, and the funds are at a record net short position right now on this hog market.
• 7:38
  SPEAKER_01: So we're pretty much there.
• 7:40
  SPEAKER_01: Uh how much further this market is gonna push it, I guess that's a question.
• 7:46
  SPEAKER_01: But uh, like you mentioned, this time of year, the inverse that we're experiencing, some of these problems are experiencing as well.
• 7:53
  SPEAKER_01: Not abnormal necessarily by nature.
• 7:55
  SPEAKER_02: Right.
• 7:56
  SPEAKER_02: And that portion of the discussion is a little bit cause and effect, right?
• 7:59
  SPEAKER_02: Like, like um, is the market lower because the um the the index funds are record shorts, or are the in are the index funds record shorts because the market's lower, right?
• 8:08
  SPEAKER_02: Yeah, and and and so those two things um will um correct themselves um concurrently, and uh you know, which leads the other is is is always the discussion.
• 8:20
  SPEAKER_01: Yeah, and they always say you gotta feed a bull every day, right?
• 8:22
  SPEAKER_01: Well, at record net short position today, it doesn't look like those positions have too much risk to say, hey, I need to I need to dump these pretty soon here before this potentially happens.
• 8:34
  SPEAKER_01: Doesn't seem like anything has been screaming at them to do that as a real response.
• 8:38
  SPEAKER_02: That's that that is exactly right, and we're certainly not calling that today, but um it is I think it is fair to at least make the obs normally this this happens opposite, right?
• 8:50
  SPEAKER_02: Like we will take the stair steps up and a rally and the elevator down, right?
• 8:55
  SPEAKER_02: Um this has definitely been stair steps down, right?
• 8:59
  SPEAKER_02: And and a slow add, you know, to their short position as um more bearish fundamentals are presented, right?
• 9:08
  SPEAKER_02: That I just attempted to describe.
• 9:10
  SPEAKER_02: Um, I do suspect that there is a real possibility that when things do start to to change or correct around here, there's going to be quite the motivation from those guys' perspective to to book some gains they have in those positions.
• 9:24
  SPEAKER_02: And so the the recovery could be quite rapid.
• 9:26
  SPEAKER_01: Especially at first.
• 9:28
  SPEAKER_01: Exactly.
• 9:29
  SPEAKER_01: All right.
• 9:29
  SPEAKER_01: Any other final thoughts for our listeners this week?
• 9:31
  SPEAKER_02: Well, let's just, I mean, a little bit on the input side of things.
• 9:34
  SPEAKER_02: I mean, we we we've been, yeah, when we think about the change in hug crush opportunity, you talked about the revenue change out through next summer at the beginning of this podcast.
• 9:45
  SPEAKER_02: Um, but just uh I mean, uh just real quick, I mean, I, you know,$27 crush per head crush change opportunity for next summer from you know its peak back in last March to what's being quoted today.
• 10:01
  SPEAKER_02: A lot of that is a drop in the hog market, of course, but but also uh change in input um you know for for our hog producers.
• 10:09
  SPEAKER_02: And so so let's just talk about corn and meal just just for a minute or two.
• 10:13
  SPEAKER_02: And and uh you know, we do have a Wazi report that's gonna come out at 11 a.m.
• 10:17
  SPEAKER_02: Central Time, you know, tomorrow.
• 10:19
  SPEAKER_02: The October numbers, usually the the monthly October numbers aren't a big deal, but we do know that they're gonna add the equivalent of two bushels of yield in the the carry-in number on corn, right?
• 10:29
  SPEAKER_02: And and so it'll be interesting to see tomorrow um what the USDA decides to to do with that number and how they adjust everything else.
• 10:39
  SPEAKER_02: We would just say that um, you know, as you mentioned, as we transition from bean harvest this week into corn harvest next week and beyond.
• 10:48
  SPEAKER_02: Um generally the perception is that our our our the the the yields we've heard so far have generally been pretty decent.
• 10:56
  SPEAKER_02: Um my personal bias is is that is that uh I mean it if if there's a lower yield number that gets printed tomorrow, it won't be materially lower than their September numbers.
• 11:05
  SPEAKER_02: And one of those two are the lowest for the year, is my in my opinion.
• 11:08
  SPEAKER_02: And so so the corn complex is changing from uh from what we believed it could have been in August and September to starting to likely loosen up here a little bit.
• 11:21
  SPEAKER_02: Um, but we're also 40 cents off of our highs, right?
• 11:25
  SPEAKER_02: So you know, as we're having this discussion, and I'm looking at nearby dees, you know, at$5, like we keep saying internally, that's about right, right?
• 11:33
  SPEAKER_02: I mean, given what we think we know about the size uh and the demand for the US crop that we're in the midst of harvesting, that's about right, right?
• 11:43
  SPEAKER_02: And so, and so you know, we will continue to pay attention to what's going on as it relates to tomorrow's balance sheet and going forward, yield reports and all of those things.
• 11:51
  SPEAKER_02: But but we we need to start to focus our attention on what's going on with weather in in South America and thinking about that next crop and and uh potentially what's happening with demand for for wheat and other things, competing uh potential of you know, wheat and other things, uh especially in that European market.
• 12:09
  SPEAKER_01: And portfolios are set up exactly the opposite on those input side of things today than the hog market.
• 12:15
  SPEAKER_01: Hog market, they're record short, they're not too worried about, you know, if good news comes, we'll get rid of these quick.
• 12:21
  SPEAKER_01: But until then, it's probably fine where we're sitting.
• 12:24
  SPEAKER_01: Fundamentally, we're where we kind of should be with the numbers we've been getting on price.
• 12:28
  SPEAKER_01: It's fine.
• 12:28
  SPEAKER_01: On the corn and soybean side, we've had a record long position between the two now for a little while.
• 12:34
  SPEAKER_01: Uh their position in the fact that if it does go down here a little bit, we're positioned about where we should be.
• 12:39
  SPEAKER_01: And maybe South America will have a weather problem.
• 12:42
  SPEAKER_01: And that's abnormal counter-seasonally, right?
• 12:44
  SPEAKER_01: We're normally have a lot figured out about these row crops by this time of the year, and usually it's a little bit better than anticipated.
• 12:52
  SPEAKER_01: Not really this time of round.
• 12:54
  SPEAKER_01: I mean, we're only we traded$13 on November soybeans here today, and that was within 35 cents of our contract ties.
• 13:02
  SPEAKER_01: Yeah, so uh that's definitely been influencing some risk management for the row crop side coming out of the field and whatnot as well.
• 13:10
  SPEAKER_01: But just uh given the picture of how portfolios are sitting for fund managers on the livestock market, specifically lean hogs, first what they are on the input side with the row crops.
• 13:22
  SPEAKER_02: Perfect.
• 13:22
  SPEAKER_02: So thanks for that.
• 13:23
  SPEAKER_02: Just um one last observation.
• 13:27
  SPEAKER_02: Um, while the crush opportunity on hogs, as we look out over the 12 months, um, is obviously materially worse than what it was six months ago, there are some incredible opportunities today as it relates to managing um your position.
• 13:43
  SPEAKER_02: And uh, you know, we're we're blessed to to to have the opportunity to interact with with with an incredible group of of hog producers and are excited about the opportunities the volatility in this market is providing for them.
• 13:57
  SPEAKER_02: And uh look forward to the opportunity to engage with with with anyone who'd like to talk through that with us.
• 14:02
  SPEAKER_01: All right.
• 14:03
  SPEAKER_01: Well, thank you for your time today, Pat.
• 14:04
  SPEAKER_01: Thank you.
• 14:05
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• 14:13
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• 14:14
  SPEAKER_01: Thank you.