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Lean Hog Futures Overview
Hog production in the United States has undergone a dramatic
change in the last decade and a half.
In 1988, Hog farms with less than 1,000 head accounted for 32% of
the market share of all Hog producers, while large 50,000 plus head
operations accounted for roughly 7% of total hog production. According to a 1998 pork industry Structure Study done by the
University of Missouri, large 50,000 plus animal operations now account
for 37% of the total Pork Industry, while small 1,000 head or less
operations only account for 5% of total US market share.
This transformation from small operators to large-scale operations
has changed the nature of the pork industry as well as pork futures
trading.
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 Hog
Production Stages & Timetable
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Prior to 1997, Hog futures were traded based on "live
weight". This was the
total weight of the Hog prior to slaughter and dressing.
Due to the changing nature of the pork industry, the Chicago
Mercantile Exchange changed the Hog contract to "lean weight",
or post slaughter based on the fact that most finished hogs are sold to
slaughter houses who priced the animals based on slaughter weight, not
"on the hoof" weight. In
order to maximize the utility of Hog futures for producers, processors,
and speculators the Hog contract was changed from 40,000 pounds live
weight, to 40,000 pounds lean weight, or post slaughter.
(Note: All prices used
prior to the February 1997 contract reflect Live Hog futures as opposed to
Lean Hog futures).
 The change from small to large Hog
producers dominating the pork industry has changed the nature of the Hog
supply. Today, systems
producers, who typically use large controlled-environment buildings known
as "hog factories" dominate Hog production.
These facilities make handling Hogs easier by providing for more
direct observation of animals, allowing greater control over the
production process and protecting both the animals and the workers from
heat, cold, rain, and snow. Because
of the close supervision of the production process and the complete
control of the environment, swine production system facilities generally
are able to produce a market weight Hog faster and cheaper since feed
efficiency is better than small-scale outdoor facilities.
Feed and labor are the two largest variable costs faced by Hog
producers. So even though the
"hog factories" require a larger initial investment, the cost
savings over time definitely give these operations a distinct cost
advantage compared to the small-scale old fashioned pen based method.
No matter what production system is used to raise Hogs, the
timetable is typically the same. The
gestation (pregnancy) time for a sow is 114 days. The average liter size is 9 to 10 piglets, with a practical
range of 6 to 13 per liter. Roughly
3 to 4 weeks after pigs are farrowing (birthing), the liter is weaned from
their mother and moved to the nursery or grower stage. During this developmental stage, pigs are fattened from 10 to
15 pounds up to between 40 and 60 pounds on a highly concentrated diet of
grain, plant proteins, and milk products.
Once the pigs reach "growing weight" of 40 to 60 pounds,
they are separated by sex. Both
barrows (MALES) and gilts (FEMALES) are fed up to nine different diets of
consisting mainly of corn, barley, milo (grain sorghum), oats and
sometimes wheat for dietary carbohydrates and fat, while oilseed meals
(mainly soybean meal) is used as the primary source of protein used to
build the leaner and more muscular Hogs of today.
This process typically takes between 38 and 42 weeks for the
barrows and gilts to reach market weight of 250 pounds from their starting
weights of 40 to 60 pounds.
 The demand for pork is
traditionally very seasonal in nature.
Pork demand tends to be the strongest during the summer in the
United States when barbecuing is more prevalent, and Americans consume
more processed meats, which typically contain a high amount of pork
products. However, the United States is not the largest pork-consuming
nation. Pork in the United
States is gaining as producers are making leaner, less fatty hogs for
slaughter. The industry has
slimmed down their pigs, with today's pork containing 50% less fat than
the pig of the 1950's. Around
World War II, pigs averaged 2.86 inches of back fat, compared to today's
leaner, slimmed down hog which contains an average of less than an inch of
back fat. This trend toward
leaner pork, coupled with the Pork Councils marketing, "Pork the
Other White Meat" television and print commercials, has increased the
American public awareness of pork. However, pork still has a stigma attached to it in North
America, though this is not true for Asia and Europe.
China is not only the largest pork-producing nation it is
also the largest pork-consuming nation.
Part of this is simply due to the sheer population in China, but
pork has been a popular part of the Chinese diet for centuries.
The ancient Chinese were so loath to be separated from pork, that
the departed was sometimes accompanied to the grave with their herd of
hogs. In 1997 China ranked as
the largest pork-producing nation, producing more than the total of the
next nine largest producers (including the United States), in aggregate.
Despite China's large prowess in pork production, in most years
China is a net importer of pork, though only a marginal importer of U.S
pork products.
The United States is the largest pork exporter in the world,
followed by Denmark. The
United States exports more pork to Japan than any other nation, as Japan
also has a strong appetite for pork.
Canada, Mexico, Russia, Hong Kong, Korea, Italy, China, the
Philippines, and Britain are important markets for U.S. pork exports.
Though export demand for U.S. pork is probably the most
volatile demand component effecting the price of pork and hogs, consumer
tastes and competition from competing meat products has more influence on
the price of hogs. Generations
of fear of trichinosis from under cooked pork, has had American over
cooking pork, reducing its taste and appeal.
However, recent marketing campaigns from the pork industry have
reversed the tide and are showing an increase in America's appetite for
pork. However, pork faces
strict competition from beef and poultry products for America's appetite.
Record poultry production in recent years has lowered the
wholesale cost of poultry, thus making poultry more attractive.
The glut of poultry hitting the market has also come at a time when
hog production is at record numbers, so pork is gaining little market
share in Americans meat consumption as it faces stiff competition from
inexpensive poultry, and beef. Pork still enjoys an increasing demand during the summer in
America, with demand for pork increasing from Memorial Day and turning
back down by Labor Day.
Though the majority of the demand components for pork are
long-term macro economic factors, the seasonal summer increase in the
consumption of pork has a strong tendency to support prices.
 The supply and demand factors
affecting the price of Lean Hogs are relatively constant each year.
January normally marks one of the lowest numbers of pig farrowings
(births) of the year. As a result, the price of Lean Hogs tends to be strong in
January because of the limited number of hogs.
March through May historically have the largest numbers of pig
farrowings. As a result, February usually has large numbers of Hog
slaughters as farmers raise cash to purchase feed for the next round of
fattening. Due to the
typically large number of hog slaughters in February prices tend to
decline during the month of February.
March through May tend to be strong periods for Lean Hogs because
it typically takes five to seven months to bring the recently born hogs to
market. June, July, and
August also is the height of the barbecue season, when the US population
tends to consume more meat products than other times of the year, which
tends to offset some of the weakness associated with the spring farrowed
hogs being brought to market. August
through December are characterized by increasing supply and slowing
demand, which results in weaker prices for Lean Hogs.
Lean Hog Futures Weekly
Composite Seasonal Chart
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Past
performance is not necessarily indicative of future results.
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SEASONAL
TENDENCIES ARE A COMPOSITE OF SOME OF THE MOST CONSISTENT COMMODITY
FUTURES SEASONALS THAT HAVE OCCURRED IN THE PAST 15 YEARS.
THERE ARE USUALLY UNDERLYING, FUNDAMENTAL CIRCUMSTANCES THAT OCCUR
ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN SIMILAR
DIRECTIONAL MANNER DURING A CERTAIN CALENDAR YEAR.
EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT
IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND
LIQUIDATION MAY IMPACT ON THE RESULTS.
NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST,
OR WILL IN THE FUTURE, ACHIEVE PROFITS USING THESE RECOMMENDATIONS.
NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN
THE FUTURE. |
