Commentary by Ben Johnson of Sector Arc Advisors
Below are areas we highlighted in our Outlook for 2021.
“Going into 2021, we have optimism that the pandemic will subside in the first half of the year, opening up our economy, travel, and food service/restaurants. The meat packing industry will need to adjust again, moving away from the retail grocery supply back to more traditional food service supply.”
“Bottom line what we are looking for – continued strong export demand, an opening of the economy/travel/food service, and shrinking of the hog supply. If we can see these areas come together, 2021 should be a friendly year for the hog market.”
Over the last nine months we have seen the greatest demand period for meat – beef, pork, and chicken we have ever had. Throughout this year, we have slaughtered a record amount of hogs, at the same time we hit all-time record high prices on the TW pork cutout ($134.94) and record high cash prices ($138) for hogs. Demand has been off the charts. The packers had an extended run of sitting back and having meat buyers banging on the doors needing product – price didn’t matter; they needed to fill that pipeline. Pork prices hit a wall in June, the cutout value has dropped just over 20% since we peaked. But going into Q4 the cutout has been able to maintain near record value for the time period (2014 mid-Oct avg $120) sitting at around $106. However, the price of the actual hogs has dropped from that record cash of $138 to $70 this week. Packers have been able to expand their margins at the expense of the hog producer.
The September Quarterly Hog and Pig report was bullish in that the sow and market ready hogs continue to show a decline going into 2022. This should be supportive to cash prices for hogs. But we have to remember that this year was a demand driven market created by something we have never done before – shutdown/and restart an economy.
Going forward, the meat industry has many challenges. Like most other industries, the labor issues will remain tough, trucker shortages both for live animals and pork product, slaughter line speeds slowing, animal well-being legislation that kicks in early 2022, African Swine Fever in the Western Hemisphere, and the 800 lb gorilla of China export demand.
From a trading standpoint, this year has been a grind. We were looking for a big move as the economy started to re-open, our timing was off as the move in product appreciation started a month early and we fought the trade to the up. And then we got caught in the switches in June thinking the fundamentals were going to be solid through mid-July and the board flipped on us the first week in June. We will continue to manage our risk with how the trading program is built by using spreads with low margin to equity allocations and tight risk parameters. We have been utilizing options more often this year as directional plays and see this usage continuing to increase with the volatility and the high risk of finding African Swine Fever in North America. Pork demand should continue to remain stout, overall commodity inflation should support prices, and the US hog supply is contracting (for now).
This material has been prepared by a sales or trading employee or agent of Sector Arc Advisors, LLC and is, or is in the nature of, a solicitation. This material is not a research report prepared by Sector Arc Advisors, LLC. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.