Harrington's Sort & Cull
John Harrington DTN Livestock Analyst

Friday 08/31/12

Staring Into the Market Abyss

As pork producers limp off the ugly battlefield of August, the walking-wounded are absolutely shell-shocked by the sudden implosion of the summer's cash market.

Since peaking on June 22 at 102.36, Iowa's weighted average price on dressed barrows and gilts has plummeted more than $30. In other words, the per head value of market hogs has eroded by $1 each and every day over last two months.

Such has been the hideous charge of a growing feed crop gone amuck. Once it became clear that the corn and bean harvest would fall billions of bushels short of the early spring promise, liquidation fever in the swine industry began to go through the roof, first in terms of bearish psychology and then by increasing number of sows sent to town.

Yet even after this breathtaking freefall, pork producers find themselves on the edge of a tall cliff looking down into a dark abyss.

Preliminary price data suggests that the national lean hog price in August average right at $87. Currently, December lean futures suggest that the monthly average could still lose another $16 by the end of the year.

Such bearish prospects made me swallow hard enough to check the history books. How extraordinary would a $16 August-to-December price slide be?

Unfortunately, not as much as you might think.

For example, a downshift of that size would be about a buck more modest than August-December 2011.

Late summer to early winter price breaks in 1998, 2001, and 2008 totaled $20.72, $22.41, and $30.29, respectively.

To be sure, price history clearly indicates that a $16 collapse over the final five months of 2012 is more than possible.

So if you're tempted to bet that fourth quarter lean hog futures have already prefigured a worst-case scenario in terms of late year supply and demand, just be sure to factor in several considerations

First of all, even if December cash averages around $70, the August-December price slide would still be $5 short of the record implosion of 2008.

Second, the destructive realities of 2012 (i.e., $8 corn, $600 meal, $75-80 costs of gain) represent a unique seedbed of herd liquidation. Excessive pork tonnage generated outside of finishing floors could be shocking.

Finally, the demand star of China that blazed across the hog market heavens through the second half of 2011 continues to be AWOL.

For more from John see www.feelofthemarket.com

(AG)

Posted at 3:40PM CDT 08/31/12 by John Harrington
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