When Pigs Fly!
Today's Idea
Although Lean Hog futures prices are at record highs, the potential increase in export business, primarily to South Korea, is expected to be completed in the first half of the year. Some traders looking for Hog prices to stay robust in early 2011 may wish to consider the purchase of a bull spread in Lean Hog futures. One example of this trade would be buying April Lean Hogs and selling October Lean Hogs. As of this writing, April Lean Hogs are trading at a 4.75 point premium to the October. Traders buying the bull spread would want to see the premium widen even further, but they should remember that trading futures spreads may not be less risky than trading an outright futures position and that there is a possibility that one side of the spread could be trading higher for the day while the other leg of the spread could be trading lower for the day.
Fundamentals
Well maybe not pigs, but lean hog futures prices are certainly flying high, with the lead month April contract surpassing the $90 per hundredweight level for the first time in the contract's history. So what is behind the stampede into pork? One of the biggest factors is likely the occurrence of foot and mouth disease in South Korea. This outbreak has forced the government to order the slaughter of at least 25% of the country's hogs in order to prevent the disease from spreading. Many traders expect the U.S.to receive increased export business from pork due to the South Korean issue. In addition, pork production is expected to continue to decline, as cold temperatures in the Midwest keep hogs from gaining weight. Hog slaughter this week is estimated at 1.268 million, which is well above the 1.192 million slaughtered at this time last year. Many large speculative traders are starting to embrace the "bull" market in Lean Hogs, as the most recent Commitment of Traders report shows large non-commercial traders added an additional 3,278 net-long contracts to their positions, which now stand at 42,881 contracts as of January 18th. Taking the other side of this trade are commercial traders and even small speculators, who are trying to pick a top in this historic market.
Technical Notes
Looking at the daily chart for April Lean Hogs, we notice a potential reversal day occurred on Thursday, as prices soared to new highs, only to close nearly unchanged on the session. This could be a signal that a much needed correction may be looming. Weak long liquidation selling could cause prices to move back towards support levels found between 87.500 and 85.000. Longer-term, we likely should remain in a bullish mode as long as the market remains above the 200-day moving average, which is currently located just above the 77.500 area. The 14-day RSI has moved into overbought territory, with a current reading of 75.445. Thursday's contract high of 92.100 will now act as resistance for the April futures, with support found at the recent consolidation low of 85.050.
Mike Zarembski, Senior Commodity Analyst
