The product market has turned, and the live hog prices are following them.
Below is how the weekly product market changed for the week ending 8/18/ 17
*Product Price Monday 8/14 Price Friday 8/18 Net Change
|* National Carcass Base Price||77.43||73.34||(4.09)|
|* National Live Price||60.75||60.02||(.73)|
**Estimated USDA Hog Slaughter Week ending 8/19/17 2,332,000
Actual USDA Hog Slaughter Same Period Last year 2,295,000
% change year over year +1.6%
Live Hog Contract Monday 8/7 Friday 8/11 WTD Net change
August hogs *84.45 – –
October Hogs 69.18 66.13 -3.05
December Hogs 63.50 61.33 -2.17
February Hogs 67.68 66.00 -1.68
* Settlement price
Looking into next week:.
- Swine Times projected last week that the product market would not hold up at the prices quoted on last Friday’s 8/11’s USDA afternoon pork report. That has indeed been the case as the pork carcass cutout lost $7.42 cwt. Unfortunately, the down is not over yet.
- The pork bellies, as we have stated before, have been the lynch pin that have been holding the packers cutouts together. The packer has benefited from unusually high seasonal cutouts. This is coming to an end, as the composite price on the pork bellies was down $13.59 cwt. on Wednesday’s 8/16 USDA close. We closed out the week at $170.43 for a total loss of $26.30 cwt. for the week. Swine Times believes that this downward spiral is just getting started. Where this stops is anyone’s guess. Our best estimate here at Swine Times is that these bellies will need to reach a price level where processors will want to freeze bellies for later. One possible scenario is the price of bellies goes so low, the packer decides to freeze his surplus and own them himself. We think this level could be around $1.25 to $1.30 cwt. This is a risk management strategy, and packers will do this if margins stay reasonably positive and they want to keep weekly slaughters at capacity. This may prove hard to do with the carcass cutout losing $7.42 cwt. for the week. We will be watching this closely.
- The retail cuts have held up reasonably well this past week. This, too, will end, but probably not until after Labor Day. As we get closer to Labor Day, the weekly kills will be approaching 2.4 million head and after Labor Day, 2.5 million head is what the industry will be facing.
How do we trade this?
- The longs and the funds in the market are looking to exit their positions in all of the hog contracts, particularly the October. October hogs open interest lost over 4000 contracts from Thursday 8/17 to Friday 8/18. If the October hogs try to rally from here prior to Labor Day, Swine Times recommends selling them.
- If that makes you uncomfortable, you can buy February hogs against them and be spread, long February, short October hogs at even money. This spread could have the October hogs go 200 under the February.
- If you are long December short October hogs, Swine Times recommends moving your December hogs back to the February contract and be Feb./Oct. spread. This will open up your position to take advantage of the pressure from the funds and longs exiting their October hogs. This will potentially increase your profits on the October short leg of the spread, because they will lose more in this move than the February hogs will. A word of caution here: be careful with this, because this spread will also increase your degree of risk if and when the October hogs have a short covering rally. Having too many of these spreads could be painful. Know your risk tolerance.
- Once again Swine Times wants to be short October hogs before Labor Day and maybe long or spread against the December hogs after Labor Day.
- Long term here at Swine Times, we are looking at being long LHV, short LHZ, and long LHG at some point in the future. These butterfly spreads work fairly well in volatile markets.
*USDA National Hog and Pork summary
** Expressed in thousand head
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