One trick pony

Sustaining a strong uptrend in hog futures would be very difficult in the absence of bullish export developments.

Dennis Smith

June 6, 2022

3 Min Read
Edward's Farm North Carolina (5).jpg
National Pork Board

Lean hog futures topped out on the opening bell following the bullish March hog and pig report. No one saw this coming. No one was expecting a $30 break, which is exactly what happened.

Certainly, the market was holding too much premium to cash in the immediate wake of the hog and pig report. But the key fundamental that drove prices sharply lower appears to have been the massive Chinese COVID lockdown.

The zero COVID policy by the Chinese Central Government created a huge headwind for many markets. Global growth slowed, Chinese pork imports slowed and lean hog futures were battered. 

Since the low was established in the second week of May, July hog futures have recovered half of the losses. Prices are swinging on either side of $112.

What happens next? Most likely the market will form another top into the seasonal high timing which I project around June 10. There's a lot of overhead resistance in this area from $112-$114. If July futures do not see a close above the $114 resistance by June 10, odds then favor a resumption of the down trend. 

Producers may want to initiate some hedges in this event. Strategies can include selling futures outright, establishing put spreads in the event that you're still of the bullish mindset (put spreads leave the upside of prices totally open) or step into some three-way risk reversals. In normal times I would have a strong enough opinion on prices to suggest a specific strategy. However, these are not normal times. 

Average hog weights have been running heavy into the summer season. It appears that packers are keeping packer owned hogs as heavy as possible as their way to deal with tight butcher hog supplies. 

Supplies have been tight due to reduced farrowing and disease issues. This strategy was also utilized by packers during the porcine epidemic diarrhea year and it appears to have worked out well for the packer.

Pork exports have been slow this year. First quarter exports were more than 20% lower than the same period last year. 

That's a dramatic slowdown and when coupled with the overall slowing global economy, it forced a hard downward correction in hog futures and wholesale pork prices. Ham prices have been the primary drag 
on the hog carcass followed by ribs, picnics and bellies. Unless China steps back into the U.S. market or some other event causes EU exports to drop off substantially, the soft/lower trend in U.S. pork exports 
will likely continue. Sustaining a strong uptrend in hog futures would be very difficult in the absence of bullish export developments. 

However, no one really knows what is happening with Chinese pork production. My sources continue to suggest that Chinese pork producers are losing huge amounts of money. Credit for feed is unavailable 
for most. Even with money available to purchase feed, corn prices remain record high; above $11 per bushel. It is highly possible that China may have to step into the U.S. pork market in a big way before the 
year is out. If/when this happens, U.S. hog prices would rally sharply. 

Hedging, some form of hedging is highly advised over the next couple of weeks. Aggressive spec traders can look to the short side with major resistance expected approaching $116 in July futures. The next 
quarterly hog and pig report is right around the corner, slated to be issued June 29. 

Source: Dennis Smith, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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