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The Hog Market Reveals Itself · Professional Ag Marketing Podcast

• 0:02
  SPEAKER_00: Welcome to the Hog Market Talk Podcast.
• 0:06
  SPEAKER_00: Your weekly deep dive into hog market fundamentals, breaking news, and industry insights.
• 0:13
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_01: Today is October 28th, and I've got Pat here with us today.
• 0:25
  SPEAKER_01: And uh we're gonna have a difficult podcast today.
• 0:28
  SPEAKER_01: We're talking about a hog market, and I think we've got a lot to talk about today, don't we, Pat?
• 0:32
  SPEAKER_02: Yeah, indeed.
• 0:33
  SPEAKER_02: Uh definitely a short straw day as it relates to talking about hog market, right, Mike?
• 0:37
  SPEAKER_01: Yeah, we do.
• 0:38
  SPEAKER_01: And that's where I want to start us off.
• 0:39
  SPEAKER_01: Just pulling up something like a December futures uh chart today, uh Jake there.
• 0:44
  SPEAKER_01: I I want to talk about the rate of descent to start this off.
• 0:47
  SPEAKER_01: Uh, if we haven't looked at the futures market this week so far, you would notice the rate of descent from uh really May to even the spike we had in July since then has been somewhat consistent and slow.
• 1:00
  SPEAKER_01: It hasn't been massive sell-off days.
• 1:02
  SPEAKER_01: It's just been they keep taking off a little bit each and every day.
• 1:05
  SPEAKER_01: Uh on the back of that, it seemed like we had slightly lower cutout prints, kind of every day.
• 1:11
  SPEAKER_01: And the futures market was reactionary towards it.
• 1:14
  SPEAKER_01: It would just react to trade a little bit lower the next day.
• 1:18
  SPEAKER_01: In the last few days this week, uh, the futures market has showed us something different and a much greater rate of descent, I would argue, in these front months.
• 1:26
  SPEAKER_01: So walk me through what we've had in this futures market and the hog fundamentals overall, but show me what's changed over the last three trading sessions, Pat.
• 1:37
  SPEAKER_02: Right.
• 1:37
  SPEAKER_01: So thanks for that.
• 1:38
  SPEAKER_02: And that's a that's a really good way to set ourselves up um for this discussion.
• 1:44
  SPEAKER_02: And there's two possible things that could be happening today.
• 1:48
  SPEAKER_02: Um, and I'd like to talk through both of them just for a second, if we could.
• 1:51
  SPEAKER_02: And so the the first um path that that we might be sort of trekking down would be a very similar path to what we've been on since the the peak of the index on August 3rd, which is um as we transition through our seasonal increase in production, um, the hog market naturally works lower.
• 2:14
  SPEAKER_02: Um clearly at this point it's working lower than what it it it normally would, but that is on the backdrop of disappointing summer fundamentals as well, right?
• 2:25
  SPEAKER_02: So so there's there's a it's it's really easy to start piling on to all of that.
• 2:30
  SPEAKER_02: And we've tried we've tried um over the last really four podcasts to talk about kind of the Swiss cheese, the holes in the Swiss cheese argument or the death by a thousand cuts sort of thing, whatever analogy that you want to use about how it's really hard to point a finger to one thing that is creating um this challenge and lower cutout every day.
• 2:54
  SPEAKER_02: But it's really um multiple things.
• 2:56
  SPEAKER_02: And any one of those things by themselves isn't a a deal breaker and certainly doesn't create this type of a net composite cutout trade today.
• 3:07
  SPEAKER_02: But the combination of all of those things is is is is putting an awful lot of pressure on this market to say the least.
• 3:13
  SPEAKER_02: And so, and so that's the backdrop.
• 3:16
  SPEAKER_02: And and then if you just wanted to add another chapter to that discussion, um, you would say, all right, a little accelerated drop week over week, but that's because now the cash market is starting to influence um the index in an even more negative way than it has before.
• 3:35
  SPEAKER_02: And so um, if you again wanted to just extend the holes in the Swiss cheese argument, you'll just say, well, that's another hole in the Swiss cheese that we have to deal with, which is a cash market that was slightly supportive a month ago to the index um relative to cutout, now certainly um is is another headwind as it relates to that index.
• 3:58
  SPEAKER_02: And so um so we still have a market that is quietly um searching for some market clearing values, really on all of the primals.
• 4:10
  SPEAKER_02: And uh we've got the extra push of uh of Casley higher supplies, which isn't at all uncommon, right?
• 4:17
  SPEAKER_02: We're gonna harvest um over the the next couple three weeks, or whatever will be one of the biggest harvest weeks for the year.
• 4:24
  SPEAKER_02: Um, and so and so that's not uncommon at all for us to have that extra supply side push that puts some pressure on this market.
• 4:31
  SPEAKER_02: And so, um, and so that is um potentially one explanation for the recent drop-off, right?
• 4:39
  SPEAKER_02: Is just the the heavier influence that that the cash market is now having having on the index.
• 4:44
  SPEAKER_02: And while not ideal by any stretch of the imagination, um you still would approach this from the perspective of um, well, these are all things that need to be dealt with and can be dealt with on an individual basis.
• 4:59
  SPEAKER_02: Let's start repairing you know the holes in the in the Swiss cheese sort of slice by slice sort of a thing.
• 5:06
  SPEAKER_02: And and again, we can go through that whole process and start talking about um you know the the currency discrepancy between the US and Mexico and and uh some some some challenges associated with economic activity in in Japan and South Korea, you know, uh expect um um accepting regionalization from Europe and and and and buying some some some product that's this that's cheaply priced from Spain.
• 5:33
  SPEAKER_02: Uh the Chinese market with a little bit burdensome production um has been uh um creating more depressed values in in the Pacific Rim region as well.
• 5:43
  SPEAKER_02: And so, and then domestically, a US consumer um that isn't feeling well today, right?
• 5:50
  SPEAKER_02: Um certainly with higher fuel prices um experiencing uh some challenges associated with disposal income, wage inflation isn't keeping up with CPI, that kind of thing, right?
• 6:02
  SPEAKER_02: And then you have a retailer who um normally but at this stage of the game would start to help the pork industry in particular, any industry for that matter, by um creating more featuring opportunities.
• 6:17
  SPEAKER_02: Well, if you've got a consumer that isn't really reacting to value propositions, and you also have higher expenses associated with just freighting product around and all of those things.
• 6:29
  SPEAKER_02: Um, those are all reasons why we're having a little bit of trouble, or it's taking more time to figure out a way to clear product.
• 6:35
  SPEAKER_02: And all that's the bad news.
• 6:36
  SPEAKER_02: The good news is it'll still work, it just takes longer.
• 6:39
  SPEAKER_02: And then, and so um, so that's a long-winded version of the first route that we might be taking.
• 6:48
  SPEAKER_02: The second route that we might that the futures market might be taking now is what I'd like to call, Mike, it's finally starting to do its job, right?
• 6:57
  SPEAKER_02: Meaning that that um the futures market has followed spot fundamentals lower on the seasonal turn, and it hasn't really forced this market um to quote unquote deal with the bad news um real time.
• 7:14
  SPEAKER_02: And so I I find myself thinking over the last day or two on this big drop.
• 7:21
  SPEAKER_02: Um, finally, the futures market is doing its job.
• 7:25
  SPEAKER_02: And what I mean by that is is it's it's the futures market job to anticipate um challenges associated with reconciling supply versus demand.
• 7:37
  SPEAKER_02: And now this is more of a conversation just about commodities in general and futures markets in general, right?
• 7:43
  SPEAKER_02: You and I were talking before we came on.
• 7:45
  SPEAKER_02: We can cite plenty of examples through the years of a futures market fixing a commodity problem before it actually became a problem, right?
• 7:57
  SPEAKER_02: And I think everyone understands what how I'm describing that, right?
• 8:00
  SPEAKER_02: There's been plenty of times through the years where where the futures market on corn rallies during the summertime because the crop is shrinking.
• 8:08
  SPEAKER_02: So instead of waiting to that, you know, we run out of out of corn in December, the futures market rallies and rations prior to the physical being an issue.
• 8:20
  SPEAKER_02: Um, I'd submit to you that so far this lean hog complex hasn't really done that, right?
• 8:26
  SPEAKER_02: Cutouts down 70 cents one day, futures are down 60 cents the day following, sort of thing.
• 8:32
  SPEAKER_02: So the futures market, up until this point, has generally been um a follower of spot fundamentals and not a leader of what's going on in the futures market.
• 8:43
  SPEAKER_02: And so, so um behind door number two might be the futures market is finally doing its job.
• 8:51
  SPEAKER_02: It's finally figuring out that we that that it needs to be in front of pricing whatever's going on today, the reconciliation between higher supply and softer demand.
• 9:04
  SPEAKER_02: We have to find a clearing price in which product can be valued, can be cleared, regardless whether it's behind door number one, that's the route that we're gonna take, or we're gonna go down door number two.
• 9:14
  SPEAKER_02: In my mind, at least, the good news is we're now gonna figure this out sooner versus later.
• 9:19
  SPEAKER_01: Yeah, because now it's it's trying to fix that problem pretty quick.
• 9:22
  SPEAKER_01: That's right, the last couple days.
• 9:24
  SPEAKER_01: And just to put this into perspective here, December lean hog futures today at 58.60 at the close.
• 9:29
  SPEAKER_01: Uh, that would be the second lowest that we've had the December hogs come off in the last 10 years.
• 9:35
  SPEAKER_01: In 2018, you came off the board at 54.95.
• 9:40
  SPEAKER_01: Uh, we did that year trade down just below$45 at the low there in August, but that would be basically we're nearing one of the worst closes in the last 10 years on that December contract.
• 9:51
  SPEAKER_01: All while back months, if you look at the spreads today, they had me all in a twist.
• 9:56
  SPEAKER_01: I'm sure I wasn't the only one because the D's was down through almost three and a half dollars.
• 10:01
  SPEAKER_01: Meanwhile, the summer months were up over a dollar and a quarter.
• 10:04
  SPEAKER_01: So, some very interesting spread action that we've noticed there in the last couple trading sessions between those front months and those back months.
• 10:11
  SPEAKER_02: Right, and that's a great observation.
• 10:12
  SPEAKER_02: And I think as it relates to that, we'll leave it at that and just say that that um while we are in an incredibly um challenging market situation from a revenue perspective, this market dynamic and coupled with the tools that we have available to us have created some really nice risk management um opportunities.
• 10:35
  SPEAKER_02: And so, like right now is a good time to say, hey, don't forget to hit the subscribe button.
• 10:39
  SPEAKER_02: But but the the uh the real opportunity here is managing this volatility and managing how these markets are acting today.
• 10:47
  SPEAKER_02: And we look forward to the opportunity to engage with um with with hog producers all across the country on figuring that out for their operation.
• 10:55
  SPEAKER_01: All right.
• 10:55
  SPEAKER_01: Well, if you need anything, please give us a call, chat with Pat at Professional Ag Marketing to help you manage some marketing risk on hogs or anything else.
• 11:03
  SPEAKER_01: Uh click the subscribe button as well down below.
• 11:05
  SPEAKER_01: There's some links to access things like daily market commentary and other cool market research info as well.
• 11:10
  SPEAKER_01: Thank you, Pat.
• 11:11
  SPEAKER_02: Thanks, Mike.