Commodity price fallout from flu fears
Fundamentals
U.S. pork producers could be hard hit by public reaction to the outbreak of so called "Swine Flu" that originated in Mexico. Already, several countries including China have halted pork imports from countries where the flu strain has been found, including Mexico and some parts of the U.S. However, cooking Pork will kill the virus, so in theory, this should have no impact on pork consumption. Nevertheless, just like the Mad Cow scare that was prevalent several years ago, it is hard to prevent initial consumers' fears, and traders have turned sellers in Lean Hog futures, causing nearby futures to plunge the 3-cent limit. Although emotions can affect prices initially, longer-term factors such as weak economic conditions and smaller Hog herds will be a greater factor on Hog prices this year. Near-term, the most active June Hog futures continue to trade at a large premium to the CME 2-day Lean Hog index, which could spell further futures price weakness. Pork-cutout values may continue to trend lower, especially if consumers initially balk at buying pork until they can be re-assured that it is safe. Although Hog futures might initially be in the spotlight, other markets such as the Grains and Energies are also affected by this Flu outbreak, with potentially lower livestock feed demand hurting Corn and Soybean Meal prices and reduced travel curtailing jet fuel and gasoline demand.
Trading Idea
Given the potential for nearby Pork demand to fall sharply as swine flu fears filter their way through the media, some traders may wish to consider bear spreads in Lean Hog Futures. An example of one such trade is selling June Lean Hogs and buying August Lean Hogs. Traders would want to see the price differential between August and June Hogs widen. As of this writing, August Hogs were trading at a 0.95-cent premium to June. Traders should remember that spread trading may not necessarily be less risky than trading outright futures positions, and it is possible for one trading month to be trading higher and another trading lower at the same time.
Technicals
Looking at the daily chart for June Hogs, we notice both the near and long-term trends were already heading lower before the major media attention regarding 'Swine Flu" hit over the weekend. Monday's near limit down opening has left a major gap in the daily charts that will act as resistance for the June contract. Prices are now well below both the 20 day 100-day moving averages, and momentum as measured by the 14-day RSI has nearly reached oversold territory with a current reading of 30.78. 65.00 is the next support point for June hogs, with the Gap at 71.10 acting as resistance.
Mike Zarembski, Senior Commodity Analyst
