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Lean Hog Commentary
Hogs did a heck of a job bouncing today. This may finally be the mini-low that we have been wondering about. If we can get some type of mini-rebound in cash that would be about one week later than normal. When you've seen a $6 drop over the past five days, any type of rebound in pricing would be welcome.
Bears do have some heavy firepower behind them now. Corn hitting new lows this week could act as an incentive for producers to pick up expansion. Don't forget that the last time USDA surveyed producers, back on June 1 for the Hogs and Pigs report, corn prices were 79 cents higher! On top of this incentive, we already have some producer/packers that will be building new hog barns to support their plants.
The monthly Cold Storage report showed pork stocks at the end of June totaled 585.884 million head. That was near the 559.1 million trade expectation (ALDL 555.493). We have to note this number only represents a 29 million lb drawdown. The five year average change for the month of June is -49.9.
Recap from Wednesday...
Philosophy of the Current Pork Expansion: We are clearly concerned about the current, though minor, expansion in the pork industry. It has been undertaken primarily from cheaper feed and not due to any sharp increase in US consumer demand. This means we are on the path that any regular expansion cycle follows...continue to expand until we start to lose money. Whether it comes from a feed cost rally or from too much tonnage and too low pork pricing, falling margins is the only question up ahead.
China: Their pork market is demanding higher production and so far producers have not met that call, and won't for a few more months at least. The China buying story is completely true and will help. They are now 20% of our pork exports. Even with that buying it won't offset the overall supply issue in pork and the supply issue for US meats combined.
Prices: By quarter we are at $75 for Q3, $63 for Q4, $64 for Q1, and $74 for Q2. Expiration prices for futures are $78 for August, $67 for October, $61 for December, $64 for February, $71 for April, $78 for May and June.
We do have to wonder if this market is getting a little too far into the undervalued territory. It is very common for deferred contracts to misjudge the size of the coming decline in pricing. We are not buying back hedges that were placed on June 23 yet (65.42 on the Dec), but it is getting tempting.
- (7/5) Sold December 64 call 4.35, risk to 6.10, objective 0. Closed 1.57.
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