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Written May, 1998					File B2-14

Seasonal Hog Price Patterns

John D. Lawrence, extension livestock economist, 515-294-6290, jdlaw@iastate.edu

Hog prices have historically shown some variation from month to month, with a tendency for the changes to follow some degree of seasonal regularity from year to year. Because the changes during the year are repetitive or consistent, they can be useful in making production, marketing, or pricing decisions.

Seasonal price patterns

Two types of information are presented in the seasonal price patterns shown here.

Average price index
The first is an average price index for each month. This shows the average relationship of prices in a particular month to the average for all months in the years included in the index calculation. The index primarily reflects the seasonal variation in price, since the calculation procedure eliminates most of the price variation caused by other factors.

Variability factor
The other kind of information presented is a variability factor that provides an indication of the reliability of the price index for a particular month. It is based on the variability of prices for a specified month during the years included in the index calculation. Specifically, the points on the charts that are above and below a particular monthly index indicate the range where the index for that month could be expected to fall 68 percent of the time. The 68 percent range statistically represents the average plus or minus one standard deviation.

Use Figure 1 as an example. The February seasonal index value is 99, and the variability range is as high as 110 percent or as low as 89 percent of the annual average. Approximately 2/3 of the time prices would fall in this range. The smaller the variability factor (the closer the points are to the index value) the more reliable the monthly index is.

Patterns by type of hogs

The following material presents information on seasonal price patterns for various classes and types of hogs, as well as an indication of the reliability of these patterns from year to year. Different hog classes have somewhat different seasonal price patterns.

The figures in this report reflect the monthly average indexes with the variability range indicated by points above and below the index values. Actual monthly index numbers and the variability factors are shown in Table 1.

Barrows and gilts
The seasonal price index of monthly average prices for barrows and gilts at five terminal markets is presented in Figure 1. On average, for the 1988-97 period, prices were below the year average during the months of January to April, then increased seasonally through July. Prices trended downward from July to a fall low in November, then moved slightly higher in December. Prices were above the yearly average from May to September and were below the annual average from January to April, and from October to December. Lowest prices were during November, and December and the highest prices were in June and July.

Figure 2 shows a very similar seasonal price pattern for barrows and gilts in the Interior Iowa and Southern Minnesota market area. Price variability, in relation to the average pattern, is smallest from June to August.

Supply factors - Tendency for prices to show seasonal weakness during the late winter, early spring, and again during the late summer and fall results in part from larger pork production during these periods than during the summer months. While sow farrowings are fairly evenly distributed throughout the year, more pigs are born during the March to May and September to November periods than in the other months of the year.

Demand factors - Seasonal price variations may also be influenced by changes in consumer demand for particular fresh and processed cuts of pork and by seasonal tendencies of pork processors to either place pork into cold storage or to reduce inventories. Demand for hams, for example, tends to be strong prior to the Christmas and Easter holidays and is usually weaker in the summer months. However, demand for fresh pork cuts is typically stronger in the fall and winter months. There is often net movement of pork into cold storage during the fall and in the late winter or early spring when supplies are seasonally large and prices are more likely to be under pressure. Net out-movement from storage is more likely in the late spring and summer as prices trend up seasonally.

Sows
Prices for cull sows sold for slaughter show a different seasonal pattern than barrows and gilts, as shown in Figure 3. Prices trended upward in the summer, then declined to a seasonal low in December. Prices were above average for the year from February through October. They were below the annual average during January, November, and December. Highest prices were in May and lowest prices were in December.

These seasonal price tendencies are influenced in part by changes in the volume of sows slaughtered in different time periods, as well as by seasonal differences in total slaughter and production of pork. Sow slaughter, as a percent of total hog slaughter, tends to be lowest in the February to April period and highest during June to August. There is summer strength in sow prices, however, due to seasonally reduced total slaughter and despite a relatively high percentage of sows in the slaughter. The actual price differential between barrows and gilts and sows is normally quite narrow during the February to April period, often in the $1 to $3 per cwt range. It is usually largest in June to August and December­often in the $7 to $10 per cwt range.

Feeder pigs
Prices of feeder pigs show fairly strong seasonal variation (Figure 4). On average during the 1988-97 period, prices were above average January to May. Prices declined seasonally through August - 35 percent from March. Prices were below the annual average in January and June to December. Stronger prices in the spring reflect expectations that there will be seasonal summer strength in slaughter hog prices of feeder pig finishers. By contrast, relatively low feeder pig prices during the summer result from expectations of seasonally low slaughter hog prices during the fall. The wide variability in feeder pig prices is due to feeder pig demand being driven by expected profits which are influenced by corn prices and expected hog prices and are susceptible to wider fluctuations than the finished hog market.

Causes of seasonal patterns

Seasonal price changes can result from changes in the supply of hogs and pork, changes in the demand from consumers for pork products, or some combi­nation of these factors. Seasonal variations in pork supply are typically less pronounced now than they were 15 to 20 years ago and in earlier years. With more of the production from larger commercial operations, sow farrowings are more evenly distributed throughout the year. But there is still enough month-to-month variation in farrowings to bring significant seasonal changes in levels of pork production. Consumer demand for pork and for particular products also varies somewhat from one period of the year to another.

Changes in seasonal patterns

Seasonal price patterns may change over time if there are changes in production technology, industry structure, or other factors that affect production patterns or demand. In addition, prices in any given year may differ from the seasonal pattern due to changes from the normal. Some examples are extreme weather conditions, unusual feed price relationships, and demand factors such as short term export opportunities. While the geographical point of the market, such as Omaha, is not the same for all areas, the general price trend will be similar in other regions.

Forecasting hog prices

The seasonal price patterns or indexes can be used very easily by producers to forecast hog prices. Because the patterns are predictable, they provide a reasonably accurate forecast of what prices will do. To use the index, divide the current monthly average market price for barrows and gilts by the current month's index, and then multiply that result by the future month's index to get a forecast of that future month's price. This forecast of selling price could be used when bidding on feeder pigs or when determining whether to hedge pigs at the current futures market price. For example, if the resulting forecast price is below the observed futures price adjusted for basis, the producer may choose to hedge at the existing futures price.

Similar procedures can be used for feeder pigs and cull sows by using the appropriate index numbers for each of those classes of livestock. It is important to note that this is for average prices during the month and not a specific price of the month. In most months, the forecast of barrow and gilt prices will be within plus or minus two dollars of the seasonal forecast two-thirds of the time. Cull sow prices will typically be within plus or minus two dollars per cwt two-thirds of the time. Feeder pig prices are much more variable and harder to predict. Their prices will typically be within plus or minus six dollars approximately two-thirds of the time.

The monthly indexes can be used as indicators of the most likely trend in prices over the next few weeks or months. The variability factors can then be used to make some further judgment about the probability of prices being close to the level indicated by the index. The actual conditions in any given year need to be considered, however, in using seasonal in­dexes. The usual pattern could be altered by a turnaround in the hog production cycle or by some other development. A shift from expansion to cutback, for example, might temper or eliminate the normal fall price decline in a particular year.

Evaluating pricing alternatives

In addition to forecasting, a producer can use seasonal price indexes to evaluate forward contracting or forward pricing alternatives. If a producer with barrows and gilts to sell in October observes a futures price adjusted for basis of $45 for October delivery, and his/her forecast using the seasonal price indexes projects barrow and gilt prices for October to be $42, then the forward pricing opportunity would be more profitable than staying in the cash market, provided the forecast is correct.

Probability of hog price changes

The actual pattern of short-term price movements over a period of years is another potentially useful guide to seasonal price changes. Decision File Hog Price Changes By Two-Week Periods, summarizes information on price changes of slaughter barrows and gilts by two-week periods throughout the year. The percentage of years that prices increased and decreased in the observed period provides an indication of the probability of particular short-term price movements. The average percentage increase or decrease gives some idea of the possible magnitude of price change. For example, the data for 1988-97 indicate there is a high probability that prices will decrease between the third week of December and the first week of January. But there is a high probability of price strength from the third week of January to the first week of February.

This information can be especially useful in decisions about the weight at which hogs should be marketed at a particular time. It can help with decisions on whether to market a bit lighter than normal or to carry hogs an additional week or so before marketing.