We Sell No Swine Before its Time!
Fundamentals
This is the slogan that Orson Wells may have uttered if he were the spokesman for the Pork industry instead of the Paul Masson Winery, but it is apropos given what is pork producers are doing these days. Last year's sharp run-up in Corn prices (one of the main components in feed for Hogs) forced many producers to liquidate their herds, including those normally kept for breeding. This led many analysts to estimate that pork supplies would be very tight in 2009. However, as commodity prices declined sharply, including Corn prices, due to the global economic slowdown, it appears that producers may not have liquidated the breeding herds to the extent originally thought. We will have our first look at what the USDA's National Agricultural Statistics Service believes has occurred when the first quarterly Hogs and Pigs report for 2009 is released at 2 pm Chicago time today. The estimate for all Hogs and Pigs as of March 1st, according to trade analysts, is between 96.1 and 98.5 percent of year ago levels. Estimates for Hogs kept for breeding purposes are between 97 and 98.5 percent.
Even though it appears that Hog supplies will not drop as sharply as earlier feared, supplies are still expected to be lower than a year ago. However, current demand for pork is weak, with Pork cut-out values down over $1 from the previous week. In addition, the April Lean Hog futures are trading at a hefty premium to the CME Lean Hog Index of over 400 points. Historically, demand tends to improve going into the earlier summer, which if true this season, and given the probability of a lower herd count, could lead to tighter supplies in the 3rd quarter. One way to play this market scenario would be to buy July Lean Hog futures and sell the April futures. This spread would work if the price differential between the July futures and the April futures widens. Currently the July futures are trading at a 1200 point premium to the April futures. Traders should be aware that trading spreads may not be less risky than outright futures positions and it is possible for one leg of the spread to be trading higher while the other leg trades lower.
Technicals
Looking at the daily chart for April Hogs, we notice prices stuck in a nearly 2-month long consolidation period. Prices have hovered on both sides of the 20-day moving average, as no clear trend has emerged. The 14-day RSI has fallen below 50, with a current reading of 44.85. Volume has fallen sharply the past few sessions, as traders have been squaring their positions ahead of the quarterly Hogs and Pigs report. In the past, price movement has become quite volatile the first couple of days following the release of the report, especially if the USDA's estimates vary from the pre-report consensus estimates. Resistance for April Hogs is seen at the highs of the recent consolidation at 64.00, with support found at the recent lows of 56.875.
Mike Zarembski, Senior Commodity Analyst
