October 24, 2016

Lean Hog Commentary

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Posted 10/21/2016

In each of the past three days we have had to increase our estimate of this week's hog kill. Those Saturday estimates kept on increasing. This morning we were talking of a 2.505 million head run (record) based off a 310,000 Saturday kill. USDA estimated it at a huge 2.514 million run after the close! The all-time peak last year was 2.499. Compared with last year this was an 8% increase in slaughter and a 7% increase in pork production (lower weights).

The monthly Cold Storage report was viewed as bearish. 642.044 million lbs of pork was found in frozen warehouses at the end of September. That was over the 628.8 average trade guess (ALDL 626.0). An additional 33 million lbs. of pork was added last month. That was the biggest increase for September in four years.

Retail pork prices fell slightly from August to September, $3.798 to $3.789. We remain a bit off the $4.215 peak that was posted in September of 2014. Don't forget, 2014 was our crazy year of record pricing and $100 per head production profits. Producers already had a low share of the retail dollar at 21.9% in August and now 19.8% in September. Last year in September it was 23.1%. At least we are still a bit off the record low farmer share of 12% that was posted in December of 1998.

We still cannot make any pricing situation show up with sub-$40 prices for September. Well actually we can (slaughter capacity). The issue here is that this week's kill was abnormally large due to last week's shortfall. We should be at a more moderate 2% - 5% increase later this winter. We are not bullish, just don't expect prices to fall further. Producers are encouraged to hold the recommended hedges in December futures at 65.42. Yes, we do have a neutral to supportive speculative trade on the books. However, only do so with a very clearly defined risk. For the next nine months in this market we would suggest stringent risk management. That applies to the markets you trade, the volume you trade, and certainly the stop-loss point you decide before entering the position. Expect worse pricing in 2017.

Working Trade:

  • (10/14) Sold December 40 put 2.12, risk to 3.80, objective 0. Closed 1.92.

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