Hello hog traders!
Macro markets open the week on the floor as Crude Oil falls nearly 10.00 per barrel to just over 30.00. Equities are lower by over 1000 points as well, coronavirus fears rage as 1/4 of Italy is quarantined. Hogs have been a good place to park money over the last week, it should be that way early in the week but we expect some softness in the later part of the week.
Hog futures were better last week, as every other market bent the knee to coronavirus hog futures hung in. Cash markets are the supportive factor, trading higher for the week as well. Signs are there that would have the seasonal low in place for April contracts. The “roll gap” left in the continuous chart comes in around 57, given the news flow a fall to that level can not be ruled out but its unlikely. If its going to happen it will come in a market like this as everything not nailed down is being liquidated
Futures are likely to open the week on the offer.Opening price calls in outside markets like equities and energy are lower as the headlines of global coronavirus infections continue to worsen. Italy has essentially shut down movement for nearly 16 million people until early April hoping to stop the spread of the virus, while in the US has infections in 30 states with 19 deaths, worsening over the last week. The good news is that the South Koreans and Chinese has had only 44 new infections and 27 deaths as of Sunday. They are likely to jump in this part of the world as more testing gets done.
If you think of the markets as a sponge and water as money, the sponge is being “wrung out” and money is leaving. We did see some signs of a near term top in the USD last week and given the interest rate cut and likely stimulus package, inflation could be right behind a virus recovery. We will stay bull spread. We think June is the place to be but do not have the gumption to be outright long right now. We will ride it out under the umbrella of Aug and Oct shorts. We may look to cover a Q on a break and go outright long OR sell J on a rally. Be ready.
LONG 2 UNITS OF JUNE HOGS
SHORT 1 UNIT OF AUG HOGS
SHORT 1 UNIT OF OCT HOGS
LOOKING INTO NEXT WEEK
- The product market has started to stabilize, albeit a week later than we had anticipated.
- The exception to this was the ham market. The ham price has topped out near term coming off a loss of $8.52 this past week, closing out Friday at $56.66. It looks like we have a little more to go, but it is our opinion you can see the bottom from here.
- We were a little surprised by the belly market. While we did project an increase in price, we did not expect the price to go as high as it did. Our sources tell us that the belly market is in good shape, and that packers positions out front are sold up.
- The retail cuts are also in good shape and are sold up next week, but the following week could see retail prices (loins and butts) start to go lower.
- The USDA Interior Iowa Southern Minnesota Hog weights went up .7 lbs. coming in at 286.3 versus 285.6 a week ago and 285.1 a year ago. We need to explain to our readers that the USDA Interior Iowa Southern Minnesota Live Hog Weights are about two weeks old when they are published. This then makes their data a little “dated” when we receive and report it. We did check packer weights this past week, as these weights are taken the week the hogs are processed. The packer weights have come in considerably lower than the previous week, some as much as 2 to 3 lbs. lower. This is a good indication that the producers are current and may even be a little sold ahead. This is significant for this time of year and has the potential to drive the live as well as the product prices higher as we approach summer.
- We did do some checking on the ports overseas to see if things had improved. What we discovered was that the ports are beginning to get back to normal operations and that China is beginning to look around for pork shipments to bring in. In our opinion, the market has started to come to the realization that whether its ASF or Coronavirus, the bottom line is this- people still have to eat. The leaders in China and elsewhere know that people have to be fed in order to keep a stable and peaceful country.
HOW WE TRADE THIS
- Even amidst all of this chaos, J-V may be something we get into but will wait until later in the week. Cash prices will likely come off at the back end of this week. This could cause the front of the curve to become weak and go lower.
- Keep doing the LHM/LHV spreads under $10.00. This seasonal tightening is a hog numbers trade strategy. As per our live weight decline of the packer weights above, we still think this is going to be a profitable spread. This past week, you could get such orders filled under $10.00. We believe this spread could go to $12 -$13. We will continue to monitor the weekly slaughters, as this will be the best indication of whether we’re right on the “currentness” (is that a word?) of the market hogs.
- Lastly, we need to point out that our bias is still bearish longer term. We are trading a seasonal tightness in supply as we approach summer. This is to attempt to catch an upward spike in the live price. Ultimately, we want to be able to sell the deferred hogs at a nice premium before the seasonal increase in hog numbers starts back in late summer or early fall. This is our long term plan, and we’ll just have to be patient and let the fundamentals drive our trading decisions.
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