In the May WASDE report, the USDA increased their projection for average hog prices in the 3 remaining quarters by $1 each. Live hog prices in the last 3 months of the year are projected to average in a range of $36-40, or close to the 2016 average of $37. Historically, the accuracy of the USDA’s May price forecast has varied greatly, with a very slight tendency to over estimate price. Since 1989, the May WASDE has overestimated price in 15 years (56%) by an average of $5.70, and underestimated price in 12 years by an average of $4.90. The CME this week is suggesting that the USDA forecast is more than $10 too low (on a live equivalent basis). Note that there has been just 1 year (2004) when the May WASDE was more than $9 too low. In that year, 4th quarter production was down 1% from 2003 while exports jumped 36% year over year. We think producers should use any further rally to sell out of the money calls against the 4th quarter.
The latest projections from the USDA’s Economic Research Service projects US 4th quarter per capita pork disappearance at 13.7 Lbs. That’s down slightly from 13.5 Lbs last year, despite a projection for record large quarterly production. The decline in the per capita number results form the USDA’s 4th quarter export projection that calls for a 7% year over year increase. But assuming the USDA’s per capita number, the price model shows that CME hog futures for the 4th quarter are likely overvalued today. The model projects an average quarterly price of $52 (lean), which is near the USDA’s lean equivalent forecast of $51. CME futures today are showing nearly $14 higher at $65.
The May WASDE slightly increased the 4th quarter production/supply forecast the 4th quarter, but also increased the price forecast by $3, with a broad range of $113-123, up from last year’s average of $108. In the last 29 years, the May forecast for 4th quarter prices has been too high in 15 years (56%) by an average of $9 and too low in 13 years (48%) by an average of $6. The last 2 years the forecast has been too high by $35 and $16 on increasing production and drop in domestic demand. The CME today is again suggesting that the USDA forecast is $3 too high. Beef demand has bounced back in 2017, and CME has been under pricing cattle for many months. We are not anxious to make 4th quarter sales at this time.