The Swine Times 9/9-9/13
Hello Hog Traders
What to Expect:
Last week was decent for us, we caught the selloff which always makes us happy going home on Friday. Chinese rumors are light as we write this, so odds of it opening without that enthusiasm is high in our opinion. We probably got a bit too cute on Friday, bear spreading instead of outright shorting. The spec liquidation on macro (currency, global economic) issues in commodities and meats specifically (see cattle). Spec longs have to be concerned when looking at the charts. The trend is in place but the break in June on Friday puts a little worry in the back of our mind. Especially given the spec funds are longer than average while the rest of the board is short. The summer contracts look to be where most of the long betting is taking place in our opinion. In the front of the curve, the fundamentals are rough but they have priced in at least some of the weakness. One spread we are going to look at possibly trading is the April vs June spread. April traded well below 15 last year by the Spring. A trade deal is going to put a dent this trades prospects. Right now, being short on the weekend a deal is made keeps bears up at night. The boy in the White House has cried so much wolf on this we don’t think the market will move hard until forks are somewhat sure there is a deal, but the fear remains. You can expect us to keep long exposure to the trade out in the curve to a certain degree.
How we see it:
Hog futures traded higher in the first half of the week on technical buying from oversold conditions and October futures discount to the cash market but that didn’t last through the week. Fundamentally, the supply outlook for the US markets have not changed. The US hog inventory is record large and weekly slaughter and production rates also continue at unprecedented levels. We would argue it’s the buying by China that has prices at these levels in Oct and Dec. See the chart below, China is buying. I imagine this demand should keep pork prices in check on breaks and some speculative premium will remain in the trade, but we are skeptical of a big rally given the reasons listed below. Stay short October for now, we look for futures to test the upper 50s before the pig crop report at the end of the month. The goal is to catch that move, but we are careful knowing sentiment can shift in a very short period given whats going on in Asia. Dec should be the short leg whipping post in spreads. Oct has a seasonal that should support it.
Short 1 unit of Oct hogs
Short 2 units Dec hogs
Long 2 units of Feb hogs
Looking into next week:
- While the belly market slowed considerably, its descent is not over yet. Our sources tell us $85-90 is very possible, before we can think about it coming to a bottom. That’s $15 – $20 lower than Friday’s close. The good news is that processors are writing bacon business, and when the bellies finally do bottom, it could be a boon to the pork cutout value.
- It sounds like USDA Interior Iowa weights have increased. This time it was a little more than previous weeks, coming in at 278.3 lbs. which is up .9 lbs. versus the week prior and are now 1.7 lbs. over a year ago. This will just add more meat tonnage to a market that is already heavy, at a time when from here forward the weekly slaughters will increase. This will add to the bearishness of the futures as all of the primal cuts will come under more pressure, and there will be more of it. Cattle is facing the same problem.
- Last week’s price action gave some confirmation that the cuts outside of bellies have bottomed short term. Retailers and processors have started to take advantage of the lower prices, Oct should show more support than DEC.
- We are confident that the hams have bottomed. Export demand to Mexico is picking up, as well as domestic processors starting to stockpile hams for the holidays. We look for the ham market to increase $3-$5 next week.
- Spec funds remain long, hogs are one of the only market within corn, beans, all three wheat, cotton, hogs and both cattle with a long position. Is liquidation coming or has the fact is hasnt come as everything else breaks a bullish sign?
How we trade this:
- While in the short run we are bearish nearby hog futures, we got lucky given the V-G action to end the week.
- We believe that a 200-300 point rally in October or December hogs should be sold. Our analysis says that the October hogs can easily go to 61.00 or even 60.50. December hogs could have a 5 in front of them, $58-$59 is possible. We say this because: 1) we haven’t gotten into the large weekly slaughters, and 2) while the July export figures were good, these numbers aren’t good enough to off take the surplus pork that 2,500,00 to 2,600,000 head weekly slaughters will produce, and 3) China and the US are going to resume talks not before October.
- Long term hogs are still bullish because pork prices are ultimately bullish. We do think China will eventually have to come in, but they may try to wait until after the US Presidential elections. African Swine Fever continues to decimate Asia and parts of Europe, and it is nowhere near being under control. The Chinese will eventually have to come to the US markets in order to fill the void left by ASF. Right now they are only buying whats needed. They have the room to buy much, much more. But right now betting that way will provide little short term profit.
- We like the LHG/LHV bear spread and believe this spread can go to $10 – $12.00. As of Friday’s close, the spread was at $7.35.
- We like the LHM/LHJ spread, and are looking at doing those going forward. This spread could conceivably go to $20.00. We want to do some more research before coming out and recommending it just yet. Watch for future editions of the Swine Times, as well as daily recommendations for updates on this spread.
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