Hog Prices and the Russell 2000

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).

If you compare these commodity price run ups to the long run price history of the S&P500, a fairly broad index of US economic growth, there is little in common with the timing and magnitude of the movements.  That may be changing.  Now that we have a substantial amount of annual production dedicated to the export markets, we find the biggest drivers of US pork prices to be changes in production and changes in export demand (as a component of total demand).

Export demand is likely to be more sensitive than domestic demand to changes in the world economic outlook, especially as we teeter near the precipice of exhausting world supplies of key agricultural outputs (due to increased demand fueled by rising incomes).  If we enter into a protracted global recession as is forecasted, regardless of the so-called bailout which is currently driving front page headlines, we will find the excess demand which has driven crop prices to record highs declining rapidly as incomes worldwide plummet.  Commodity demand in general will pull back and agricultural commodity prices will follow.

Since we have lost all of the classic roadmaps to forecast prices for hogs, I suggest it is quite possibly time to watch the Russell2000 or S&P500 as benchmark predictors of future hog and ag commodity prices.