The Swine Times 12/23-12/27
Hello hog traders
Hogs traded toward the upper end of the weekly range going back to early Nov, Rallies are going to be limited from here on Monday as the market prepares for the Dec Hogs and Pigs report o Monday. Expectations are for a record hog herd, up from record levels set a year ago. We know this is a broken record, but the market remains torn between the push that is record large Chinese import demand due to African Swine Fever losses/US trade deal and the pull that is record slaughter, weights and supply.
The report is released on Monday after the close,heavy supply is baked in. If we get anything other than that, don’t expect an easy pre-Christmas trade on Tuesday. We like our position for the report. The long G gives us upside protection from a bullish surprise while a big bearish number (specifically to the breeding number) could cause risk managers to start hedging Aug and Oct aggressively.
Long 1 unit of Feb hogs
Short 1 unit of August Hogs
Expectations for the report are for significant expansion:
- All hogs -103%
- Kept for breeding- 101.9%
- Hogs marketed- 102%
LOOKING INTO NEXT WEEK
- As you can see below, the product market remains under pressure. Monday’s report is unlikely to change that.
- The hams lost $9.57 and this represent a $1.72 cwt. loss to the cutout. Bellies lost $4.54 cwt., which equates to approximately .60 cwt. decrease for a combined decrease of the ham and bellies to the cutout of $2.32.
- We do not see this trend ending anytime soon. We look for the retail cuts, loins and butts to flatten out and possibly inch higher, but there are no cuts on the USDA carcass cutout that will move substantially higher given the slaughter and weight numbers.
- The US has just too many hogs right now. As you can see, the week ending 12/21 slaughter was 2,810,000 which is a record. Next week’s Federally Inspected Slaughter will be large as well. While it won’t approach 2,810,000 it will still be unseasonably large given it is a holiday week
- We need to ask ourselves what if China wasn’t in the US buying pork? What would the prices of pork be then? How aggressive would packers be to fill their kills?
- Our best sources tell us that the hog numbers will not start to decrease until at least mid January. This will keep live hog and pork prices under pressure.
- The USDA Interior Iowa Southern Minnesota live weight came in at 287.0, down .4 lbs. from last week’s weights of 288.4 but are still 3.6 lbs. over a year ago. This is just adding to the bearish sentiment in the pork market. We need weights to continue lower, at least seasonably, if not more.
- Bottom line is beef and pork packer margins are in for a major compression. This is what is happening now and will continue to go on until the weekly slaughter numbers decrease in both markets.
- We will also get news that frozen stocks are near record high as well with cold storage on Monday. We normally see declines starting in Oct, that didn’t happen in the Nov report. I think we could see another surprise hike on Monday given the hoarding that likely started with a trade deal to China in mind. Supply is available to all buyers, China demand is welcome!
HOW WE TRADE THIS:
- We aren’t giving up on buying LHG outright on corrections below $67.00. We do believe that hog numbers will tighten and the February hog contract can benefit the most.
- We are advising out readers to take off the LHG/LHJ spreads over -$6.00. This spread is stuck in a 200-point trading range, and the volatility of the spread, in our opinion, just isn’t worth it to gamble it breaks much above that.
- Unless the China demand blows expectations out of the water, premiums in the deferred hogs are dangerously high and at some point we will have to take a stand and just sell the deferred hog futures, specifically August and October. We will be selling very conservatively, because of the volatility these premiums represent.
- We think that a “wreck” is coming to the entire pork complex. Over the next few weeks and months we are going to try and determine just when that is and advise our readers accordingly.
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