For weeks now, traders have been expecting U.S. slaughter rates to jump as the government has consistently reported a swelling domestic herd this year. Hurricane Florence hit North Carolina, one of the top hog states, in mid-September, slowing down processing operations. But that bottleneck should have cleared by now, and analysts were expecting a sudden rush of hogs to market. Instead, slaughter rates have stayed low, raising questions about whether the animals were ever really there, said Rich Nelson, chief strategist at Allendale Inc. in McHenry, Illinois.
The lower-than-expected U.S. slaughter is coming at a time when a highly contagious, pig-eradicating virus is spreading through China, the world’s top pork consumer. African swine fever continues to spread in the country, with several new outbreaks reported this week. The combination of supply woes sent hog futures in Chicago up by the exchange limit of 3 cents on Wednesday to settle at 57.525 cents a pound. Prices have surged 11 percent this week.
“We don’t have this backup in market hogs like we expected,” Nelson said, adding that U.S. Department of Agriculture estimates for rising animal inventories may have been miscalculated.
This sounds like a case of supply inelasticity meets rising demand.
Lean Hogs are trading at the lower side of a four-year range and may currently be in the process of putting in a higher reaction low. A sustained move below 50 would be required to question current scope for additional upside.