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Lean Hog Commentary
Cash hogs broke a little today. It won't be enough to cause the trade to definitively say that this rally is finally done. A top has been called in this rally something like three to five times so far. We will have to wait for wholesale pork. Wholesale pork fell by 92 cents today (reversing Monday's 81 cent gain). Though the trend on pork is just "sideways" in the past three weeks, this is not yet a break below support. Everyone knows there is a top coming here soon. No one wants to call it yet.
We are still concerned about the minimal decline coming for the Q2 pork production. Our own estimate of 6.285 billion lbs would run only 136 million under Q1. That would be the smallest decline from Q1 to Q2 production in 12 years.
A Tyson Foods official stated that the company will change its retail chicken offerings to product fed with no antibiotics starting in June. On the positive end, perhaps the lower production associated with this measure would marginally ease a part of the meat industry's oversupply.
Brazil's poultry exporter industry group, ABPA, estimates world avian flu has caused an unfilled market gap of 700,000 tonnes on an annual basis. While we fully recognize that this is a bullish sounding story let's point out two things...1) the current bird flu findings in the world are severe but are not at the pandemic levels of 2005/06. 2) bird flu in 2005/06 was bearish for chicken demand. Stating that there is a supply disruption, without also pointing out there may be a demand problem too in those affected countries, is not the whole story.
We will hold from speculative sales until the market is ready for it. On the hedging side we have talked about a synthetic short position for summer hedges. The recommendation was to buy an $80 June put, to establish a floor, and to sell an $86 call to cheapen the cost. If done today, that would cost just over $3.00. It could be wise to move that $80 put to a lower strike price. Hedges for spring hogs have been filled already (buying a $71 put and selling a $76 call). RN
- (2/15) Stand aside.