Taking a look at the Lean Hog Futures contract prices one really wonders whether we are setting up for the same situation as last year. Everyone knows that hog prices will get substantially higher over time but the question is a little confused by the seasonal pattern.
Current prices indicate that packers are making a lot of money since their demand is the sum of both domestic demand and international demand. The futures today and for the recent past show the December contract above the October for 2008, even though the volume of animals in the fourth quarter of the year almost always is the highest volume of the year.
December contract prices higher than the October is therefore counter-seasonal and suggests another dynamic in play, namely, higher demand or fewer hogs than previously expected. That may very well happen but the pattern last year was that the increased demand from China (for instance) and some passthrough of higher prices was forecasted too early. For several months, as the deferred contracts became nearby, the futures prices fell dramatically. Today is not anything like a sure indication of the coming reality by any stretch but we see the familiar pattern of the two nearbys dropping while the deferreds advance. Add to that, the pig market's most notorious bull, Jim Long, is morphing into a bear for the fourth quarter. That ought to make everyone a little uneasy.
Spring and summer 2009 look like they ought to with decreased production and higher average feed costs than a couple of years ago but the transition to the full realization of the passthrough is murky waters. Kraft announed today that higher product prices at retail are now being "accepted" by consumers. Price points are advancing without resistance. The media has so prepared the ground here that higher prices are not only expected they are anticipated. Therefore, there is very little resistance to these first significant price increases.
