As we watch the markets throughout the world plunge trying to find a trading range, we are witnessing the global market reset to economic fundamentals. Before you think this is unambiguously bad (the reset) consider that this entire event spanning the last two to three years was set in motion by government policy actions and the flood of liquidity beginning after the September 11th attacks. The market is simply correcting now what government policy actions have caused, a massive destruction of the mirage of paper wealth they created.
If you take the long look at the history of hog prices you see two significant shifts since 1950. These are both upward movements to new equilibrium levels and they happened beginning in about 1971 and 1999 (or 2003 if you see it that way). Both were the result of rapidly increasing (new) demand for agricultural commodities and were more or less unrelated to the economic movements of the general economy at the time. The first move in ag prices was the largest in percentage terms (but we are not completely finished with the second movement which began 6-8 years ago).
After nearly getting there on June 24 of this year, the June 2009 Lean Hog Futures contract on the CME closed above $100 today. It opened trading in mid April of this year in the high $80s. If that price holds, it represents a near doubling of the carcass price for hogs since January of this year.
Don't worry though, we are constantly reminded that such a small percentage of commodity costs roll into the final retail price that you will probably not even notice this impact for the summer barbeque season next year.
As for me, I'm still on the "buy the biggest freezer you can afford and fill it now" kick but you can wait if you like. Try to get the cryovac type packaging if you take my strategy, it freezes well for a lot longer than the typical cellophane wrapped cuts.
It is not getting any better – The losses are continuing in the swine industry. This past month feed prices kept going up while hog prices improved some but not near enough. Losses in the open market are still close to $40 a head and everyone keeps wondering when will it get better and what do prices have to get to before we start getting profitable? Well, the first thing we need to do is to somehow get supply reduced. The last cold storage report shows that we have an abundant supply of product. Even though exports have been very good we need to reduce supply to get any significant improvement in prices.
Yellow Series is Corn Prices; Green Series Hog Prices
If you believe markets work and in agricultural commodity markets we have the closest thing to competitive market structure that is likely to be found, you believe that sustained higher corn prices due to Ethanol production will eventually work their way not only into food prices but into higher live hog prices.
We have previously talked about his and how our commodity industries at the production level act like "margin" industries. That is, if no fundamental factor effecting the normal return to these industries change (like sustained increased risk, new technology, or new barriers to entry or exit etc.), then input price changes will wind up initally lowering profits but then through a rather predictable set of economic adjustments, return the participants to approximately the same profit level before the change took place. There are all kinds of things which might make the new profit level a little more or less than the past but essentially we are beginning already to see this phenonmenon working its way through corn markets where seed costs, fertilizer costs, fuel costs, equipment costs and soaring land rental and purchase costs are returning the margins to pre-ethanol levels for corn producers.