August versus October Futures Pricing

Every year about this time I begin commenting on preparations for summer heat relief in grow-finish facilities. Today it is a little tougher to think about summer when parts of Minnesota had up to 20 inches of snow in the past 2 days and our local soil temperatures at the 4-6” depth are averaging in the low 40’s at best. Soil temperatures this morning at the University of Minnesota Southern Research and Outreach Center at Waseca were running about 38F and the Southwest Research and Outreach Center at Lamberton is reporting frost from 18-52” yet under bare ground.

Even with the current cold weather, we really need to begin thinking and planning today for our summer heat management strategies. In a meeting with a client on Tuesday, the comment was made that August 15 is the critical deadline for summer plans this year. That is the last day of trading for the August lean hog futures contract. On August 16 all forward pricing contracts will begin using the October futures contract.

Yesterday (April 17), August lean hogs closed at $121.90 while October closed at $99.30. This is a difference of $22.60. With the average US barrow and gilt carcass currently averaging 217 pounds, this is a difference of $49.04 per carcass. Pigs sold in late August that are priced using the October contract will have almost the same feed cost as pigs sold in early-mid August using the August contract.

In either case, these pigs are already placed in grow-finish facilities. What have you done to sell as many pounds as possible in early August versus late August? Yes I know the August and October contracts most likely will converge somewhat but with a possible $49 hit to income based on a calendar date (August 15), summer heat management strategies suddenly have a very strong economic incentive, especially for those using any type of market risk management that is based on the futures contracts.

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