Monday, March 3, 2014
Being a carnivore in the U.S is going to get more expensive this year, as both Cattle and Hog prices are at record levels. Cattle inventories are at their lowest levels since the early 1950's, and smaller supplies of market-ready cattle are expected to lower beef production by over 5% this year. Hog inventories are expected to decline, as an outbreak of PED virus has already killed over 4 million pigs since the virus was confirmed in the U.S in the spring of 2013. With no vaccine found so far to deal with the virus, producers are doing their best to try to contain the disease. However, it is likely that some producers will be forced out of business, which will hamper herd rebuilding efforts.
It's not only beef prices that will be giving consumers sticker-shock at the grocery store this spring, but pork prices are expected to rise as well, as hog supplies are expected to tighten due to an outbreak of the PED virus. This virus which has a high mortality rate among young pigs is expected to put a significant dent in the size of the Hog herd in the coming months. This reduction in Hog supplies comes at a time when U.S. pork exports are inspected to increase, especially with Russia expected to resume U.S. pork purchases later this month. Cash market participants report that pork cut-out values have risen sharply this past week, trading over $101.00 per hundredweight at week's end. Even though Lean Hog futures are at record price levels, the market may still have some room to move higher, as the full effects of potentially lower slaughter rates have not yet occurred. U.S. pork production is still above last year's totals for the first 2 months of the year, as higher Hog weights have made up for lower supplies of market ready Hogs. Buyers still appear willing to pay higher prices for pork, as it remains a better "value" when compared to the price of beef. With both Cattle and Hog prices at record highs, we should not be surprised to see more poultry served at barbecues this summer.
Looking at the daily chart for April Lean Hogs, we notice prices trending sharply higher following a 3-week consolidation period in which the market hovered between 92.500 and 95.000. For the past 2 weeks, we have seen prices rally by over $10 per hundredweight, as trend-following traders became aggressive buyers. April futures continue to trade at a premium to the 2-day CME Lean Hog Index, although the index value has posted gains the past 7 days. Non-commercial traders have been adding to their rather large net-long positions the past week, according to the Commitment of Traders report, with commercial traders taking the other side of the trades. Prices continue to move further away from both the 20- and 200-day moving averages, but the 14-day RSI has moved to extremely overbought levels, which currently stand at 87.44. With prices beginning to move in a "parabolic" fashion, traders should prepare for a potential increase in price volatility in the coming days. Near-term resistance levels are tough to evaluate, as we are in record territory, but psychological resistance may be found at "round number" price levels from 107.00 to 110.00. Support is seen near 95.000.
Mike Zarembski, Senior Commodity Analyst