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Paragon Commentary

Futures File: Hogs and Oil

Jul 20, 2018

Hog Market Under the Knife

Hog prices have been falling sharply in recent months, feeling intense pressure from escalating trade disputes between the U.S. and pork-buying trade partners.

In the current dispute, China has imposed tariffs against U.S. pork sales. These tariffs are likely to stick for a while, as President Trump escalated the fight on Friday, threatening to place taxes against all $500 billion of Chinese imports into the United States.

Additionally, Mexico, the biggest buyer of U.S. pork, has already imposed tariffs against American meat in response to the steel tariffs imposed by the White House earlier this year.

As a result, the two biggest buyers of U.S. pork will likely look to other foreign suppliers that aren’t taxed as heavily, hurting demand for American hogs. This will create a massive backlog, which is pressuring prices for hogs. Earlier this year, lean hog futures traded as high as 84 cents per pound, but the upcoming August contract is closer to 65 cents now, and is projected to be as low as 46 cents per pound by December.

These prices will be devastating for U.S. hog producers, who can only hope for a trade resolution in the coming weeks if they didn’t lock in higher prices earlier this year. For consumers, this likely means that their Christmas ham could be the lowest price in years.

 

Russia Benefitting from Oil Prices

With our relationship with Russia receiving increasing attention this week, markets are watching Russia’s economic growth and its dependence on energy prices. Oil is Russia’s #1 export with natural gas and coal second and third, respectively. The energy group dwarfs all other exports and provides nearly half of Russia’s export income.

For this reason, Russia joined with the Organization of the Petroleum Exporting Countries (OPEC) in an agreement to cut global oil production in an effort to raise prices, which has largely been successful. Since falling below $30 per barrel in early 2016, crude oil has been rising, helping Russia to purchase machinery, computers, and other goods in addition to raw commodities like rubber and soybeans.

As of midday Friday, nearby crude oil prices stood at $69.80 per barrel.

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