June 27, 2016

Lean Hog Commentary

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Posted 6/24/2016

The Hogs and Pigs report can be considered just a little bearish. USDA counted 68.381 million head of hogs in the nation as of June 1. That was 1.8% over last year and over the trade's +0.8% average guess. For hogs on the ground, that will be marketed over the next six months (June 1 - November 30), USDA counted the Kept for marketings group at 1.9% over last year. In the meat world we make comparisons against last year and not against last month or quarter due to the sharp seasonal changes in both supply and demand. Don't forget that the year's lowest supply point is right now in the summer in early July. Of the Kept for marketing group they suggest +180 lbs at +1.2%, 120 - 179 +1.2%, 50 - 119 +2.2%,  and 0 - 50 lbs at +2.5%. Allendale is not concerned about any massive drop in front month lean hog futures. This market is ready to post the seasonal peak in cash hogs but the real problems don't hit until after summer. The year's biggest supply is in November/December. The +2.5% year/year numbers for the lightweight group is over the private analyst guess of +1.2%.

As hogs are such prolific producers we don't need a large breeding herd to produce the year's 122 million hogs born in the US this year. USDA's report suggested this group at 5.979 million head, 0.9% over last year. This is a jump from the March report which showed the breeding herd unchanged with 2014. It was also over the average guess of 0.4% higher. As USDA's survey would be for numbers as of June 1 this showed that producers were expanding as the same time as feed costs were rising. This year's profitability allowed them a bit of cushion. For future production we monitor the next two quarters of farrowing intentions by this class of producers. The June - August intentions, which determine December through February slaughters, was seen at 2.3% under last year. That was next to the 2.2% lower analyst guess. The September - November intentions, which determine March - May 2017 slaughters were pegged at +0.7%. The bottom line with this whole Hogs and Pigs report is that we have a few extra numbers around right now through Q4. We will test the nation's slaughter capacity for a week or two this winter but shouldn't break it.

The 2 pm Cold Storage report showed end of May pork stocks at 612.715 million. That will be considered supportive when considering the average guess at 638.523 million from Allendale (608.635) and one other meat analyst. This represents a 25 million lb drawdown from end of April levels. That is right inline with the 24 million five year average drawdown.

As a reminder to those new to livestock markets, we urge you not to get too excited about CS numbers. In the meat industry, stocks or ending stocks don't quite mean the same as in grains. Our focus in the meat world is the amount of product left in the US after net exports. It is this measure, meat left for the US consumer on a per capita basis, and not stocks which drives price. Much of the meat you see in these Cold Storage numbers is simply product prepared for exports.

The weekly kill came to 2.103 million head. That was a bit lower than our 2.131 estimate noted in the AM comments. This is a surprise as to our knowledge the only plant down today would be Farmer John out of California. This number was 1.8% under last year in the same week. This is a bit off the 1.2% higher than last year pace seen in the previous four weeks. We don't expect this smaller kill to represent any new trend, especially after the Hogs and Pigs numbers. For the big picture perspective we cannot call a top yet in cash hogs but it should be close. On Wednesday we  officially advised producers to hedge up all hogs for marketings through February. That still stands.

Trade Recommendation:

  • (6/24) Sell August 86 call 2.05 or better, risk to 4.10, objective 0.

There is a risk of loss when trading futures and options contracts.

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