Quantitative Analysis /
Global

Pork meat bubble finally bursts

  • Pork prices had overextended 75% from their average – the largest on record

  • Prices have since fallen 27% and are projected to fall another 28% over the next 12-months

  • There is a systematic shift towards lower pork prices over the long term

Pork meat bubble finally bursts
James Huckle
James Huckle

Quantitative Analyst

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Tellimer Research
6 September 2021
Published byTellimer Research

Performance

Year-to-date: +28.1%

12-months: +52.1%

Current price: 90 cents (per lb)

Machine learning forecast

Lean hog futures are projected to fall -27.9% to 65 cents over the next 12-months according to our machine learning forecast. 85 cents and 75 cents are expected to offer support to two brief rallies on the way down, but ultimately these rallies will be of little real significance.

Bubble burst

Pork price deviation from 2-year average

Lean hog prices have historically traded within a 37% price band of their 2-year average for the vast majority of the time (95%). However, the rapid increase this year from 69 cents to 123 cents is the largest on record and it unsustainably forced prices 75% away from their average – this represents a four standard deviation event (0.1% probability).

As one might expect in a market with a history of mean reversion, it has since reversed back down towards its 2-year average and is currently trading at a 22% premium. This premium is expected to be wiped out within the next 12 months and perhaps even lead to a period of overcompensation with prices falling 30% or more from current levels.

Technical analysis

The price of lean hog has generally increased c1% per year since 1974. However, 2014 saw the market crash over 50% from its all-time-high and ushered in a 5-year bear market. The spike up this year to 123 cents was not enough to eclipse the 2014 high of 134 cents that remains encompassed within the highlighted bear channel spanning the past two decades. The move down to 90 cents over the past three months has solidified the systematic shift to longer-term price depreciation.

The dashed line running through the center of the bear channel represents a strong area of resistance which is expected to suppress any attempted upside rallies over the next 12-months. Price overlap is high, so two-sided trading can be expected and speculators would be wise to operate a looser stop loss.