Hello hog traders
Hogs rang in the new year on the upswing but touched limit down on Friday. The wide spread between the index and Feb futures hog futures had the market under pressure at the end of the week as year end spec buying was covered. The cash market has been weaker through the holiday season, but should trade at least sideways for the coming week or two. Pork product demand is improving at weaker prices as China interest stays strong. We will look to possibly add some G length to the market as we feel J should be the whipping post soon.
Long term, the cash market should reach $95-100 by this summer on China demand for a host of US ag products. Spec funds are virtually flat the board right now, we think buying picks up if the Chinese bill of goods is as high as we are hearing. Signing is set for the 15th in DC. There is also big USDA grain report at the back end of this week to be aware of.
LONG 1 UNIT OF FEB HOGS
SHORT 1 UNIT OF AUGUST HOGS
Looking into next week:
- Retail cuts were on the defensive the entire week.
- The loins lost $1.40 and the butts lost $1.00. From what our sources tell us this trend may not change until late next week or the first of the following week.
- The ham market made up for the loss of $1.09 from the previous week by going up $1.08 this week. We believe the hams may have a $3- $5 bounce this next week to ten days , but until the weekly slaughters start to come down, the ham market will be limited on any substantial increase.
- Bellies will offset those gains in the carryout. They are very limited in our opinion as to how high they can go.
- There is another factor involved in regards to the price of bellies this year. The industry has always been able to slaughter more hogs than the bacon processor can cure and slice in a given week. What is unique about this year is the fact that with all of the product being sold to China, there is very little storage capacity left for storing bellies before processing. This just forces the packer to either export the bellies over seas (which further exasperates the storage problem) or take belly prices low enough that retailers run liquidation sales. It’s weird dynamic that has developed thanks to a change in exports, be ready for some cheap bacon prices at the store.
- The weekly surplus product dynamic will change only when the weekly slaughters are reduced. They can do this one of two ways or a combination of all of them. A) They can reduce the daily kills from ten hours per day down to 8 hours per day, B) by eliminating the Saturday slaughter schedules altogether.
- The USDA Interior Iowa Southern Minnesota live weight went up this past week coming in at 287.1. This is an increase of 1.2 lbs. from the prior week, and 1.2 lbs. over a year ago. We believe this increase is nothing to get concerned about it is just a function of the reduced weekly slaughter because of the Christmas holiday.
- Packer margins are reduced but still in the black. We will continue to look for a change in the weekly slaughters and export news to China to fundamentally drive the live hog prices.
How we trade this:
- This past week the basis did narrow as the cash market went up .79 while at the same time the February hog futures lost $3.00.
- We continue to like the LHG/LHJ spread, especially now that the basis is starting to narrow and the deferred contracts are still carrying a hefty premium. We like doing the spread at $6.50 to $7.00 and would take profits at $3.50 to $4.00.
- We also like selling LHJ over $78.00, and would take profits at $71-$72. We probably see the former before the latter with China signing the deal on the 15th
- We think there is more to squeeze out of G-Q, be ready for profit taking there if we would get up over 15.00
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