Last week Smithfield Foods, the largest hog producer in the United States, announced third quarter profits above expectations. Smithfield reported increases in revenue and profits in their fresh pork division. Specifically, they cited sharply lower procurement prices for live hogs as the reason for enhanced profits in fresh pork.
Cash hog prices declined to 14-year lows during this period. Product prices, by the way, did not come close to a 14-year low during this same period. Smithfield also reported enhanced profits in the packaged pork division. Strangely, at least to me, Smithfield cited higher selling prices for pork as the reason for generating handsome profits in their packaged meat division.
So let’s summarize the above information. What we’re talking about here is the largest pork producer in the United States. This firm also packages and labels pork as well as sells wholesale pork on the domestic market and in the export market. Smithfield is also solely owned by a Chinese firm. Smithfield and the other major packers systematically broke cash hog prices to 14-year lows while at the same time selling pork at higher prices. Is there anything wrong with this picture? Does this sound like fair competition? I ask; who is looking out for the independent hog producer?
Moving to the hog market itself, on the backside of my column last week focusing on the positives in the hog market, lean hog futures managed to stage a dramatic and impressive upside breakout. A coincidence I’m sure. What this price rally does, however, is provide a near-perfect opportunity for hog producers to seek protection from a sharp downturn in prices. The use of put options is highly recommended. Such strategy provides a measure of downside protection in the form of a price floor, for a given premium paid, while leaving the upside to market prices open. This is the function of puts as applied to hedging in hog production.
Despite the impressive upside breakout, in the near term, serious challenges await the hog market. The possibility exists that slaughter capacity will be challenged and exceeded with butcher hog supplies before the end of the year. Historically, if a serious problem is going to develop it will occur on either side of Thanksgiving. When it happened in 1998, and yes I was a broker then and remember it clearly, packers cracked hog prices to below 10 cents per pound.
Perhaps not to this extreme, but there is no reason to believe this won’t or can’t happen again, at least for a short period. December lean hog options expire in the middle of December. This should provide ample time for protection against a sharp drop in cash hog prices in the event that slaughter capacity is exceeded and butcher hog supplies are slotted for kill.
Beyond and in addition to the threat of slaughter capacity being challenged is the market’s ability to process and digest record large production without seeing prices move sharply lower. This is where puts in the February and April timeframe will come into play. The recent cold storage report showed ham stocks at the end of September at nearly 250 million pounds. This is a record. It also confirmed a large in movement of hams during the month, suggesting that current price levels are not low enough to clear product. This is where my confusion lies. The cold storage demonstrates a massive build in ham stocks yet Smithfield reported higher selling prices for packaged pork during the same period?
In the meantime I’m still searching for answers and I’m still working hard to protect my clients from a possible downward spiral in prices. In addition, I’m still wondering who is looking out for the independent hog producer in the United States.
The opinions of Dennis Smith are not necessarily those of NationalHogFarmer.com or Penton Agriculture.