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While prices for agricultural commodities often have predictable seasonal cycles, livestock such as cattle and hogs have extend lengths for their cycles. In the case of cattle, history has shown that industry to have a fairly predictable 10 year cycle from peak to peak, with hogs being in the range of 4 years. A look at the fundamentals of this phenomenon will allow the astute investor to make profitable decisions in the lean hog market.
During the summer of 2002, prices for lean hogs dipped below $.50/lb, forcing many pig farmers to rethink their investment in hogs. In an attempt to get out of the business, many sold their remaining inventory, causing a huge spike downward by the end of '02 to below $.30/lb. A similar scenario occurred in the previous trough in '98 when low prices throughout the year caused sharp selling by the end of that year. The bottom of the lean hog market seems to be characterized by this sharp selling which pulls prices significantly lower for a short period - the perfect buying opportunity for investors. By the summer of 2002, hog inventories were very low as many had already been sent to the slaughterhouses. This decline in supply led to a virtual straight line incline in prices for the next 12 months. By year end 2003, pig farmers had started making profits again and many wanted to expand their inventories of hogs. To do this, fewer animals were sent to slaughterhouses in favor in breeding them to develop new inventory. This decline in the supply of hogs to slaughterhouses caused another 12 month increase in the price of the commodity. By the start of 2005, the time the young had been born and farmers were able to part with the new parents, excess inventory had started to become a problem again - a noticeable selling point for investors. The drag on prices has continued, and the hog market is approaching the point where many pig farmers may soon exit the market and sell off remaining inventory. A sharp spike downwards by the end of this year may be in the works, an event that astute commodity investors would be advised to take advantage of. If that point occurs, readers of The Commodity Investor will be informed.
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