Hello hog traders
The story remained last week but we the potential for sentiment change is in the cards with trade talks scheduled between the US and China this week. Regardless, ASF continues to spread across Asia and the CME continues to price in stronger US pork exports to China and other Asian countries. Remember when we talked a few weeks ago about the ractopamene ban? US packers are reacting by adapting production to meet Chinese regulations.
Summer 2020 contracts are now priced over the 2019 summer high. Hogs are not cheap at these prices, for this time of the year given the supply on hand. We expect that the premiums hold in the summer contracts while the cash and spring hog markets will trade around China-US sentiment.
Cash is strong right now, that can not be ignored. Hog basis continued to strengthen as the cash market rallied every day, the index has the look of a bottom and the cutout is at a 3 week high. All the while, record large hog slaughter rates continue to pour in, and the September Hogs and Pigs report confirmed that trend will continue into the end of the year. This is not bullish for cash over the longer run, continued exports are needed.
Futures traders will probably keep the trade somewhat close to the best into Wednesday, then look to trade the China-US meetings. A deal is not necessary to keep premiums in place, but positive rhetoric is.
SHORT 2 UNITS OF DEC HOGS
LONG 2 UNITS OF FEB HOGS
FRONT MONTH HOGS- WEEKLY
Looking into next week:
- The belly market this past week was strong. The increase week over week was $13.42, we do not believe the highs are in. The possibility of bellies going to $1.45 to $1.50 is a real.
- Hams took an unexpected dip because a major packer got delisted as an approved supplier to Mexico. As a result of this announcement this packer was put in a bind. The product previously sold is now surplus and they had to find a price level to clear the surplus hams. This caused the ham market to lose over $2.00 on the week.
- Loins and butt prices consolidated this past week as expected, but should increase in price as we get into October, maybe 5 to 7 dollars up from where they settled on Friday.
- There is a lot supportive cash news, but the industry has projected a weekly slaughter of up around 2,700,000 head next week. This should temper the increase in prices on all the primal cuts not just loins and butts.
- The administration has just completed a trade deal with Japan this past week, and the Chinese most likely have taken notice. If it weren’t for the politics distracting the administrations in both countries, a deal could be reached sooner than later. However, until an agreement is reached, volatility will most likely remain in the market.
- Swine Times has mentioned in previous newsletters that the Chinese, and for that matter most of Europe and the rest of the world will not accept pork with ractopamine in it. As of this week a letter was sent out by JBS one of the largest packers in the U.S and the world, that they are going to be ractopamine free. In other words they will not be processing hogs that have been fed ractopamine. While producers may be upset by this development in the long run in will benefit them by expanding the export markets to which they can sell.
- The USDA Interior Iowa Southern Minnesota live weight came in at 281.9 up 1.4 lbs. From a week ago, and are now 1.9lbs over a year ago
How we trade this:
- We like the LHG/LHJ spread and we also like the LHM/LHJ back spread.We think either one or both of these spreads will make money over time. A year ago the LHM/LHJ spread went over $20.00
- This may also be an opportunity to be butterfly spread. With the LHG and the LHM being the wings or the long legs and the LHJ being the body or short leg.
- We think December hogs gain on and February hogs in the short run. In other words as long as the product, especially the belly prices, continue to go higher. It may be less risky just being long a few December hogs outright, rather than being positioned in any kind of December hog spread. Be ready to exit this spread early this week.
*USDA National Hog and Pork summary
** Expressed in thousand head
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