June 26, 2017
This week we will touch briefly on what happened in the pork product market, the live hog market and how this will likely play out this week.
There is also a USDA Hog & pig report that will be out on Thursday 6/29, and this could add a few wrinkles as well.
Here is a summary of Pork Carcass cutout and live hog prices for week ending 6/23.
*Product Price on Monday 6/19 Price as of Friday 6/23/17 Change
Loin 96.57 93.64 (2.93)
Butt 106.38 106.53 .15
Picnic 65.81 68.36 2.55
Rib 150.98 153.63 (2.65)
Ham 72.77 71.79 .98
Belly 173.77 187.90 14.13
Carcass Cutout $96.57 $101.15 4.58
Base Price $85.44 $85.85 1.41
*National Live Price $64.65 $67.20 2.55
As you can see, the carcass value gained $4.58 while the live hog price gained $2.55.
Now, lets look at the same time frame and compare what the first three live hog futures contracts did this past week.
Live Hog Contract Monday’s Close Friday Close Net Change for the week
July Hogs 83.90 85.30 1.40
August Hogs 81.48 78.65 (2.83)
October Hogs 69.38 68.20 (1.18)
The July hogs did not narrow the basis to the cash hog market by much, but as we draw closer to expiration, the basis will narrow. In our opinion, the futures will gain modestly on the cash. At the same time, the cash prices, with a short slaughter week going into the Fourth of July holiday, will be under pressure. Time will tell.
Looking into this week
- Despite an increase in the product market, our analysis remains the same. The product market, with maybe the exception of bellies and hams, will top out. You are beginning to see this starting with the loins and the ribs. For the first time in the past three weeks, trimmings are becoming toppy, and as the trimming market goes down, the meat cost of boneless hams and loins will go up. As these cuts increase in price, they will meet resistance from the retailer.
- There will be days going into the holiday that prices may be mixed. After the Fourth, the real product pressure will begin as we get back to five full slaughter days.
- While five full slaughter days is likely to push the product lower, it will have the opposite effect on the price of live hogs. Packers will not be hesitant to pay a half to a dollar higher, if needed, to fill their processing schedule.
- The packer margins are still unusually good for this time of year. This is important to remember.
- Bellies exceeded our $1.80 estimate last week and closed out at $187.90 and stand a decent chance of going to $2.00. This could add another $1.50 to the cutout, but more importantly, they will help offset some of the price losses from the retail cuts.
How do we trade this?
- Buy LHQ, as they are at too big of a discount given the cash market ($12.00).
- Buy LHQ/LHV August/October hog spreads at $10.50 or better. The risk is about $8.00, but the spread could go to $13.00 or more. Don’t get attached to this spread, as it’s just a trade, not a campaign. If you get to 150-200 points, take the profit.
- On sharp rallies, sell October hogs lightly, as we still have a lot of summer left to go. Just be patient.
- Do not forget that there is a pig crop report at the end of the month. It will probably be bearish, but find someone who doesn’t know that. The fact that there are more hogs coming this fall is not exactly a revelation, and we have to ask ourselves how much of that is already built into the deferred live hog contract prices.
- Watch the weather and temperatures. If you get cooling temperatures, you could see a quick drop in the live price.
*USDA National Hog and Pork summary
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