Happy Monday Hog traders
We come into the week on the back of a very negative few weeks in the lean hog complex. Between falling cash prices and the tariffs announced last week, we feel much of the negativity is priced in. Our current positions are poised to do well if the product market would bottom and we get a change in the tariff policy, we think both could be in the cards. Be ready for position adjustments this week, the quarterly Hogs and Pigs report is released on Thursday after the close. Livestock markets will have a three day weekend in remembrance of Good Friday.
Starting the week our positions are:
Long 4 units of June hogs
Short 1 Unit of August Hogs
Short 2 Units of October hogs
Below is how the weekly product market changed for the week ending 3/23/ 18.
Looking into next week:
- The first thing we need to address is the potential tariffs on pork because the president wants a more level playing field when it comes to trade. Our opinion at Swine Times is that the market is overreacting to the announcement by China and that next week things will return to a more normal trade barring any other new developments. The potential for a 25% tariff is in the future, if it happens at all. Keep in mind that this past year China hasn’t been taking that much U.S. pork anyway. If we were talking of Japan or South Korea we would be more concerned.
- News has already come out that both governments are negotiating to avoid a “tit for tat” trade war. It sounds like at the back end of this, we could see the US with more access to Chinese markets, not less. Here is a link to this morning’s Wall Street Journal.
- Turning our attention back to the product market we can with some degree of confidence state the following.
- The hams have or are close to bottoming
- Bellies may go to $85 before finding a bottom. We are a little dubious about that, but it is a possibility. We do know that bacon business is being booked at these levels, however it may be mid April before we see this reflected by an increase in the USDA composite belly price.
- Loins and Butts are in decent shape at these levels but are not being aggressively
The bottom line on the product market is that until these weekly slaughters come down legitimately, and the weight on these hogs gets sold off, the product market is going to find it difficult to have a sustained increased in prices. From what our contacts in the field tell us is that this may not happen until we get into late April or early May.
How we trade this:
- As our last paragraph above indicates, going forward, at least for the next week to 10 days is that in lieu of the still ample hog numbers ,it is just not the time to get “too bullish”.
- We still think there is going to be a spring rally, albeit delayed, but we will have one.
- The June /October hog spread, is still in our opinion, a good trade to have on, but be patient. it will work best when the cash hog market has bottomed.
- The same holds true for the June /August hog spread. We recommend doing these at $2.00 June discount to August. We think it could go to $3.00 June over August, but would look to start taking profits with June a $1.00 over August.
- The potential for tariffs from China or a negative report on NAFTA is the reason we are staying with bull spreads. The front option is more closely tied with the cash market and therefore is, to some degree, supported/stabilized by the cash market. While the deferred contracts potentially have more risk because they represent the unknowns in the market.
- There is a USDA Hog and Pig report Friday April 30’th. Be careful and adjust your positions accordingly. We will have a commentary on it in next weeks Swine Times to let you know what our analysis is and how we see the futures reacting.
*USDA National Hog and Pork summary
** Expressed in thousand head
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