"Where's the Pork?"
Fundamentals
Although the famous quote from one of the national hamburger chain's commercials was "Where's the beef?", livestock futures traders are probably exclaiming "Where's the pork ?" ahead of this past Friday's USDA quarterly Hogs & Pigs report. The report released minutes after the end of trading is expected to show all Hogs and pigs as of June 1st totaling 96.9 percent of last year's figures. Hogs and pigs kept for breeding are expected to fall to 96.5 percent of year ago levels, and those kept for marketing are expected to total 97.0 percent of last year's figures. The declines expected in the size of the U.S. Hog herd are part of the fallout from the slow pace of the economic recovery, which hurt producers' profit margins because retail consumers switched to alternative and cheaper protein sources such as chicken, which put a damper on wholesale pork prices. Operating losses forced some more marginal Hog producers to either exit the business entirely or sharply curtail their breeding herd to help stem the "red ink". However, the Hog market finally got a bit of good news at the end of last week, as the U.S. and Russia have finally worked out an agreement that will allow the U.S. to resume chicken exports to Russia after a six-month ban. The resumption of chicken exports is important to the pork industry, as the excess supplies of chicken due to the export ban caused wholesale poultry prices to fall, which in turn allowed retailers to run chicken price specials and made pork look more expensive to consumers. Although expected tighter supplies of Hogs coming to market should support wholesale prices later this year, there are still concerns about the speed of the economic recovery and whether consumers will be able to afford to have pork on their barbecue menus this summer.
Trading Ideas
Lean Hog futures have been in an uptrend since August of 2009, as traders began anticipating lower Hog supplies in the coming months after producers began to liquidate a fair portion of the breeding herd due to unprofitable operating margins. Now that prices have recovered, there are concerns as to whether consumer demand will increase given the slow pace of the economic recovery. Current fundamentals may favor a period of price consolidation until the market is able to determine the longer-term supply and demand outlook. Some traders expecting Lean Hog futures prices to move sideways the next several weeks may choose to explore trading strategies that would benefit from a sideways market. One such strategy would be the sale of a strangle in Lean Hog options. An example of this trade would be selling the August Hog 90 calls as well as selling the August Hogs 75 puts. With August Hogs trading at 83.525 as of this writing, this strangle could be sold for about 1.000, or $400 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in August should August Hogs settle below 90.00 and above 75.00. Given the potential loss involved in selling naked options, traders should have an exit strategy in place in case the position moves against them. An example of such a strategy would be to close out the trade before expiration should August Hogs close above the short call strike price or below the short put strike price.
Technicals
Looking at the daily chart for August Hogs, we notice the extent of the uptrend that has been formed since the major lows were made back in August of 2009. The uptrend line was broken briefly earlier this month, as a commodity wide sell-off tied to weak equity prices sparked a serious bout of liquidation selling. However, the sell-off was short-lived, as buyers took advantage of price weakness to initiate new long positions. The 14-day RSI has moved back into neutral territory with a current reading of 53.63. The June 7th low of 78.20 looks to be strong support for August Hogs, with resistance seen at last week's high of 85.10.
Mike Zarembski Senior Commodity Analyst
