Bears Continue to Feast on Pork BBQ
Fundamentals
There certainly have been few "green shoots" for the pork industry this year, as sluggish demand and weak exports have send hog prices tumbling. Just yesterday, Smithfield Foods, the world's largest pork processor and hog producer, announced it would cut its U.S. hog heard by an additional 3% due to an oversupply of hogs this year. The recently announced cuts in production will bring Smithfield's total cuts to 13% so far this year. Weak packer profit margins has kept bids low for market ready hogs of late but herd liquidations continue to bring more hogs to market in despite lackluster demand. Hog slaughters came in at 410,000 head yesterday, up 11,000 from this time last year. If there is a bright spot in this bear dominated market it was the uptick in port-cutout values on Monday, with prices jumping by $0.86 to stand at $56.85. However, the CME 2-day average Lean Hog Index value continues to tumble, falling by an additional $0.03 to stand at $57.14. Despite the over $2 decline in the Lean Hog index the past 7 sessions, nearby futures continue to trade at a premium to the Lean Hog index, with may spur more speculative selling as traders look for the premium to narrow amidst weak cash market demand.
Trading Ideas
While current pork demand remains weak, signs that U.S. Hog producers may be serious in reducing the size of the herd, may spur higher Hog prices later in the year. Traders looking for a rebound in Lean Hog futures prices may wish to look at bearish Hog futures spreads for possible trade opportunities. An example of a trade is selling July Hogs and buying December Hogs. Currently July Hogs are trading at a 0.75 premium to the December contract and traders would want to see the December contract gain on or even move above the July contract. One should remember that spread trading may not be less risky than holding an outright futures position and it is possible for one contract month to be trading higher and the other lower at the same time.
Technicals
Looking at the daily chart for July Hogs we notice prices hovering near their lows of 2009, falling nearly $15 per hundredweight since January. Prices remain well below both the widely watched 20 and 100-day moving averages and momentum remains weak. The 14-day RSI remains in oversold territory with a current reading of 28.04 though off lows made last week. Contract lows of 57.875 made on June 10th remain as support for the July contract with resistance seen at the gap lows on June 2nd at 62.15.
Mike Zarembski, Senior Commodity Analyst
