Understanding the Spring Slump in Hog Prices – What Traders Need to Know
Historically, a predictable but often overlooked trend impacts hog prices, creating risks and opportunities for traders. From February through May, prices take a seasonal dip as an influx of hogs hits the market, driven by the fall pig crop reaching market weight. But supply alone isn't the only factor—weather conditions, growth rates, and shifting demand all play a role in this annual price movement.
So, what exactly will contribute to this spring slump, and how can you use it to your advantage?
The fall pig crop maturity:
The fall pig crop, born in the later months of the year, reaches market weight around February-March, contributing to a surge in hog availability. The 2024 fall pig crop has had an opportunity to take advantage of lower feed costs (corn) than in the past. Could this add more weight as these hogs are brought to market?
Larger spring pig crop:
The spring pig crop is usually more significant than the fall crop, meaning more hogs will be ready for slaughter later in the year, further influencing the price decline in the early spring.
Weather impact:
Cold weather can slow pig growth rates due to increased energy demands for maintaining body temperature, reducing feed efficiency, and prolonging the time needed to reach market weight. However, once temperatures moderate, pigs experience compensatory growth, where improved feed conversion leads to a sudden surge in weight gain, resulting in a concentrated supply of market-ready hogs. This synchronized market entry amplifies supply pressures during the February-May period, further contributing to the seasonal decline in hog prices.
Seasonal demand:
Unlike beef, which sees stronger demand during the grilling season and holiday periods, pork consumption remains relatively stable, with no significant seasonal spikes between February and May. Additionally, export demand for US pork can weaken during this period as key importing countries adjust their purchasing patterns based on domestic production cycles and trade policies. With no significant domestic or international demand increase to offset the seasonal supply surge, hog prices face additional downward pressure during these months.
This brings us to the recent Canadian and Mexican tariffs:
The recent tariffs imposed on Canada and Mexico will dramatically impact exporting pork, considering Mexico is our most significant importer of US pork.
Seasonal patterns:
Source: Moore Research Center, Inc. (MRCI)
MRCI research has found that hog prices peaked in February or March over the past 15 years before declining into the latter portion of May. The abovementioned fundamentals make it easy to see how this seasonal pattern evolved.
As a crucial reminder, while seasonal patterns can provide valuable insights, they should not be the basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
Source: Barchart
The daily chart of the June Lean Hog futures contract shows last fall's seasonal low price followed by a rally to the February highs (green line.) After peaking in February, at contract highs for June, prices fell like a waterfall. Currently, hog prices are overextended to the downside and may need to rally to find more sellers to continue the current seasonal downtrend (red line.)
The disaggregated Commitment of Traders (COT) report:
Source: CME Group Exchange
Like the grain markets, before they collapsed recently, pork producers aggressively sold (red bars) as the price (yellow line) rallied to $.92, holding 200K short contracts. While it's not unusual for producers to sell into rallies, it is interesting how aggressively they sold at lower prices than last year in the recent rally. During April 2024, prices rallied to $1.05, and they had 197K short contracts.
Perhaps producers were already anticipating lower prices, and the idea of tariffs against Canada and Mexico made them sell more aggressively.
Products for traders to participate in the lean hog trade:
Futures traders can trade the standard-size 40,000-pound futures contract using the symbol (HE). There are no lean hog equity market products to trade. Two exchange-traded funds (ETFs) have lean hog futures contracts, which are considered commodity index funds, not just lean hogs. These products are the Invesco DBA and DBC ETFs.
In closing…..
Understanding the seasonal downturn in hog prices presents a valuable opportunity for traders who can anticipate and capitalize on these market movements. Historical trends and factors such as supply dynamics, weather impact, and shifting demand contribute to a predictable price decline from February through May. The additional influence of trade tariffs on key pork-importing nations like Mexico and Canada only adds complexity to this market shift. Traders can make more informed decisions when approaching this recurring cycle by carefully analyzing technical indicators, seasonal research, and market positioning through tools like the Commitment of Traders (COT) report.
For those looking to participate, lean hog futures (symbol HE) provide a direct way to trade this seasonal pattern. At the same time, ETFs like Invesco DBA and DBC offer broader commodity exposure, including lean hog contracts. However, while seasonality provides valuable insight, traders must remain disciplined, integrating risk management strategies and other fundamental and technical factors into their trading plans. Those who recognize and react to these seasonal price shifts can position themselves advantageously in the lean hog market through futures or diversified commodity funds.
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