What’s that smell … a rally in the cash hog market?

We’re anticipating a high likelihood of a sharp cash hog market rally in late-July and into August. If it develops, anticipate a move in the August lean hog contract possibly as high as $86.

Dennis Smith

July 19, 2016

4 Min Read
What’s that smell … a rally in the cash hog market?

I love the smell of sizzling bacon, baking ham, roasting pork loin, and the smell of a rally in the cash hog market. It’s my educated opinion that moving into the second half of summer we’re about to embark upon a sizable and impressive rally in the cash hog market.

This week I’d like to discuss the factors at work that might contribute to such a move.

First off, on the backside of a very warm June, July is experiencing a warm pattern dominated by a heat wave across the Corn Belt during the third week. It’s my opinion that hogs have not been backed up all spring and summer. In fact, given the discounted board and the associated incentive to pull hogs ahead, producers should be very current. Heat has kept weight off the hogs, reducing total tonnage produced. Finally, keeping current for an extended period sometimes will result in a hole in butcher hog supplies at some point. Several sources are indicating that pork packers are worried that such a hole could/will develop sometime during August.

Hog futures established their seasonal peak on schedule near the Fourth of July. We were sellers of the board for our hedge customers. However, given the magnitude of the decline in futures in such a short period, we’ve actually covered most hedges, taking profits with the expectations that we’ll get another chance to put these hedges back out. Our theory surrounding a hole in numbers in the late-summer timeframe had a lot to do with the decision to cover profitable hedges. Our downside measurement in the August hog contract was $76.40. Current prices have not reached this target, but we’ve come to within 50 points of our target several times. In addition, the August contract is running discount to the CME lean hog index. Given this information and incentive, we’ve covered all short speculative positions in addition to all hedges. We’ve moved into long August calls with our speculative crowd. Finally, for our most aggressive speculative trader, we’ve gone long August futures using a sell stop just below the April lows.

The lean hog seasonal tendencies suggest that a low of major consequence may not be in place until late-August. If our marketing-hole theory is correct, the lows will come in early, by the end of July. There are two fundamental items to watch for that would confirm a hole in numbers likely resulting in a substantial price rally.

First, watch pork packer processing margins closely. Current margins have been very profitable with margins actually improving into the second half of July. This is very rare and typically is the function of plentiful supplies of butcher hogs. If processing margins suddenly begin to slip and erode rather suddenly, you can bet that a sharp decline in hog numbers is just around the corner. The second fundamental factor to watch for would be weekly slaughter numbers falling toward 2.0 million head per week after running in excess of 2.1 million all summer.

U.S. pork exports remain a bright spot for the industry. When dealing with record large production, rising exports are critical in keeping hog prices above the cost of production. Pork exports in May reached a new recent high in terms of production. January through May exports are up just 1.2% compared to the same period last year. But the trend would suggest that exports will continue to grow during 2016. Exports during January to May to our largest customer, Mexico, were down 4.6%. Exports to Japan, our second largest customer have been down 4.9%. However, exports to China/Hong Kong, our third largest foreign customer, have been up by 137%. Record high pork prices in China should keep their import needs high. We are in competition with Europe pork producers and Brazilian pork producers to meet the expanding demand from Asia.

The fact that U.S. pork packers are in the process of expanding hog slaughter capacity is confirmation that improving foreign demand will continue. Packers have a pulse on the export market better than anyone. The other wild card in the pork export arena is Russia. We don’t expect Russia to return to the U.S. market, but if they would begin accepting European pork, it would be a real positive development for world pork prices.

In conclusion, we’re anticipating a high likelihood of a sharp cash hog market rally in late-July and extending into August. If it develops, anticipate a move in the August lean hog contract possibly as high as $86. Such a development would set the table for renewed hedging opportunities in the fall and winter contracts.

About the Author

Dennis Smith

Archer Financial Services Inc.

Dennis Smith has been a full service commodity broker specializing in grain and livestock trading for over 30 years. Dennis has a wide range of customers many of whom are grain and livestock producers. Dennis and his partner, Patrick Garrity, develop and execute hedging and speculative trading strategies in their evening Daily Livestock Wire which is prepared each afternoon exclusively for their customers. Dennis grew up in Central Illinois and earned a Masters Degree in Agricultural Economics from the University of Illinois before launching his brokerage career.

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