Bulls Going "Whole Hog" into Lean Hog Futures!
Fundamentals
Speculators have gone "Hog Wild" as Lean Hog futures continue their bull run. Since major lows were made back in August of last year at just under $44.00 per hundredweight, front month Lean Hog futures prices have nearly doubled in price. This is likely due to the fact that the Hog industry is feeling the effects of the economic crisis which occurred last year when lower protein demand caused producers to liquidate breeding herds, which in turn is causing market-ready hog supplies to remain tight. Meatpacker's pork profit margins remain strong, which is encouraging producers to bring hogs to market even though average hog weights are lighter than normal, which is keeping production totals light. Pork cut-out values have moved above $90.00 for only the second time in history and are the highest since the peak of the great commodity bull market back in the late summer of 2008. High retail pork prices are making some traders nervous that consumer demand for pork will start to decline, as buyers look for alternatives and cheaper cuts of meat for their protein needs. However, large speculative accounts seem to have little concern about futures retail demand, as their net-long position in Lean Hog futures is just below record levels. The most recent Commitment of Traders report shows large non-commercial traders holding a net-long position of 52,654 contracts as of April 20th. Although is this just over 5,000 contracts below the record levels set the previous week, Tuesday's sharp rally may encourage fresh speculative buying back into the market, as last Friday's sharp reversal day may have put a short-term bottom in place. Improvement in consumer confidence readings is also viewed as a positive for pork demand, as a brighter economic outlook by consumers may assure that there will be plenty of pork on the barbecue as we move closer to the Memorial Day holiday in the U.S and the unofficial start of the summer grilling season.
Trading Ideas
June Lean Hog futures prices may be at a crossroads -- a large speculative net-long position could cause fresh buying by trend-following systems as prices move closer to the $90.00 per hundredweight level, or it could spark a round of long liquidation selling if recent support at $84.00 fails to hold. Traders looking for a big move in hog futures who are unsure of the direction of the move may wish to investigate the purchase of strangles in Lean Hog futures options. An example of this trade would be buying the June Lean Hog 90 calls and buying the June Lean Hog 82 puts. With the June futures trading at 84.675 as of this writing, this strangle could be purchased for about 2.30 points, or $920 per strangle not including commissions. The premium paid would be the maximum potential loss on the trade, with the trade profitable at option expiration in June should the futures settle above 92.30 or below 79.70.
Technicals
Looking at the daily chart for June Lean Hogs, we notice last Friday's major price reversal as hog bulls failed to move prices above the recent highs of 87.80. Traders rallied hog futures on Tuesday, but the news that S&P downgraded the credit ratings of Portugal and Greece triggered a "flight from risk" by speculators, which triggered selling across the commodity sector and pushed June hog futures to settle well below the day's highs. Since Friday's "reversal", prices seem to be hovering right around the 20-day moving average, as short-term bulls and bears battle it out for control. Contract highs at 87.00 remain strong resistance for the June contract, and a close above this key chart point could trigger a test of major psychological resistance at 90.00. Friday's low of 84.00 looks to be near-term resistance, and a failure of this price level could send prices tumbling towards the 100-day moving average just above 80.00.
Mike Zarembski, Senior Commodity Analyst
