The Swine Times: Drowning in Data and Trade Talks – June 24-28

Hello hog traders,

To say hog futures took it on the chin last week would be an understatement. The market got a double dose of continuing cutout collapse and spec fund liquidation.  Funds are leading the liquidation charge as front month futures get pounded, but it is joined by commercial selling as well.  At on Thursday of the week prior, July futures were 2.00 over the August board price. By Friday at mid-day, July was nearly 2.75 under the Aug as value in July fell apart. The summer rally many of us (us included) just never developed.  The seasonals show slaughter will increase, not decrease going forward.  Once we get past the 4th so hoping for a rebound will depend heavily on the export market.  Without one, prices for Q4 contracts Oct and Dec open themselves up to major price discounts.   Cold storage data last week showed stable freezer stocks, retail demand is decent given higher supply but it’s not strong enough to eat up excess product. The lack of a trade deal is telling.

Another chapter in this “trade war” will be written

On Friday the G-20 meeting will begin in Japan.  The highly anticipated meeting is going to be chock full of new US-China innuendo, which if bearish could add to more fund liquidation pressure. We aren’t sure when the Trump-Xi meeting will take place, Japan is about 15 hours ahead so we should know something by Friday mid-day, if not the Monday open will be interesting.  It’s silly to speculate on what will happen here in the short term with too much capital.  We are willing to be late in regards to betting on increased US-Chinese imports, the chess board has the look of a stalemate at this point given the ability for both sides to play with currency.  China has already implemented another massive stimulus and liquidity program designed to prop up their economy as business contracts, meanwhile the US FOMC is now on board with the president’s wishes to cut interest rates, giving US markets a boost on hit of the good stuff.  Both markets have stabilized in the last month, both sides are still considerably high and dry from a public relations standpoint.  We see this trade war continuing for a while, with little impetus for action until someone loses something.

Big Week of Data

The markets will be digesting a lot of data this week. The Quarterly Hog and Pig report (pig crop) report comes out on Thursday at noon.  You can expect us to have the net short exposure buttoned up by then.  The Q2 pig crop report is expected to show the herd has expanded by 2-3% over last year’s record.  We find it unlikely we don’t see a bearish supply report on Thursday, if we do it probably comes from the exporting of carcasses that may or may not be accounted for.  Any bullish disappearance will cause buying. It’s the end of the Q and 1st half of the year, some speculators are bailing out for appearance reasons, that should end next week after the 4th of July holiday.

USDA grain stocks and planting data will also be on Friday, which could bring about a tight feed grains theme that could also bury livestock speculators.  Again, we look to be conservative going into the end of the week.    The bottom line is there is too much near term supply vs demand. The lack of a cash market rally is keeping the next leg of speculators out of the market while folks in the market are bailing because of price pressure. Meanwhile, the African Swine Fever continues to spread like wildfire with no end in sight.  Obviously, speculators want a piece of this but they are paying dearly at this point. We think many longs are scrambling and are moving Q4 longs to Q1 of next year. Over the long run, higher overseas prices will bring about high prices in the US but in the short term we could easily see Oct and Dec futures trade into the 60’s. We’re not too much into technicals but the continuous chart below does not look pretty.

FRONT MONTH HOGS – Monthly

CURRENT POSITIONS:

• LONG 1 UNIT OF AUG HOGS
• SHORT 3 UNITS OF OCT HOGS
• LONG 1 UNIT OF FEB HOGS

AUG VS OCT – Daily

OCT VS FEB – Daily

Looking into next week:

• The loin and butt market, relative to the other cuts, did a pretty decent job of holding their value this past week. We look for both cuts to be steady to weak next week.
• Hams were down much more than we thought they would be, ending $10 lower on the week. We did hear decent interest from the export market late Friday afternoon.  We think the ham market has bottomed and could stabilize if not work higher from here going into next week. This is noted given our outright short position.
• We said bellies were in a $7-$10 trading range, and they ended the week at $9.61 lower at 101.66. We know that processors are writing bacon orders at this level. Here at Swine Times, we believe that the bellies should stay in the $100-$115 trading range for the next week to ten days. After that, provided we finally get the slaughter level reduced, the belly market should start its seasonal move higher.
• Once again, the USDA Interior Iowa Southern Iowa Live Weights went this past week. The weights came in at 284.6 versus 285.2 the week prior. While this is constructive and we needed this to happen, the fact of the matter is that they are still 6.1 lbs. over a year ago.  This is too much, as they still need to come down to within 2lbs of a year ago or more.  Once this happens (if it does), then we are prepared to say that the market hog herd is current and live prices have bottomed.
• The other obstacle keeping the live hog prices under pressure is the USDA weekly federally-inspected slaughter (FIS) levels. This past week, as you can see by the data above, the FIS was 2, 449,000 versus 2,164,000. This is 285,000 head more than last year with hogs that are 6 lbs. heavier than they were a year ago.   What we want to point out by going through this exercise is, if it weren’t for the US government purchasing pork through the mitigation program, the prices above would be a lot lower than they are now.

How we trade this:

• The cash hog market is still in a bear market trend. However, the summer hog futures areare now lower that the cash hog market.  We view this as constructive mostly because the “China syndrome” has, at least for the short term, run its course.  The futures are currently trading the facts on the ground rather than the potential China purchases.

• This is why we still like the LHN/LHQ spread. The LHN are discount the cash and the risk has been lessened to some degree in that spread. This should help Q vs V.
• G-V finally broke its lows and really broke out to below -3.00. Let us re-emphasize that this spread will take advantage of the deteriorating cash price, while at the same time, you have a long leg in a deferred contract if there is a China announcement or purchase.  The LHG leg will help to mitigate some of the risk you have by being in a bear spread.
• As usual, continue to pay attention to the trade talk news and watch the Interior Iowa Weekly Live Hog Weights closely. Be prepared to adjust your positions in a moment’s notice as the news and/or circumstances dictate.
• Again, the USDA Quarterly Hog and Pig report this Thursday, June 27 after the close. Be sure and adjust your positions in such a way that you can minimize your risk and sleep at night.

*USDA   National Hog and Pork summary

** Expressed in thousand head