Quiet action for the most part during the trading day Monday at the CME. We would rather focus on the far deferred months, where sharp price declines were seen on the December and February contracts. Believe it or not the December contract is actually suggesting the highest price ever (for that contract) will be seen. The market is currently under the belief massive liquidation is taking place right now. It believes that liquidation in the first quarter means sows will not get bred. Those missing sows will not farrow in the second quarter, which means fewer hogs for slaughter in the fourth quarter. That liquidation, combined with very aggressive export hopes this year is suggesting December futures will be almost $20 higher than last year's low prices! Is that realistic? On the first issue of liquidation, we discussed in recent commentaries that liquidation is not coming on hard and fast. In the most recent three weeks of data sow slaughter was 4%, 12%, and 6%. It should be running 10% to 20% higher and stay there. Essentially, the actual numbers, rather than industry rumors, are suggesting liquidation is not as great as hoped. On Friday morning in the supply/demand report USDA confirmed that thought by upping the 2008 pork production total from a 3.7% increase to a 5.0% increase. On the second issue, pork exports, USDA kept the numbers stable with a 15.9% increase. Our export total is more conservative with an 11% increase.
Let's get to the point. The table at the end of this report shows past December contract expiration prices and the change in pork production for the 4th quarter. Normally lower pork production makes a higher price. The opposite is true. Normally a 1% change in pork production equals a 1% to 2% change the opposite way in pork prices. The past few years, as you can tell, do not always follow that rule. In 2004 pork production fell 1.3% in the fourth quarter, but prices were up 49% and almost $25! The current 2008 contract is implying a 35% increase, worth over $19. Does that mean every year with a moderate production drop makes for a dramatic price rally? No. Keep in mind in 2004 we had a huge 27% increase in pork exports. We had a double whammy of avian flu in Asia and BSE in the US and Canada, which helped demand for US pork. While we certainly agree December 2008 prices will be higher we are not sure if anything more than $10 higher price needs to be seen. With the last of solid liquidation proof we will add hedges to the October, December, and February contracts. Speculators holding short April puts should hold them to expire worthless and collect all premium.
|
|
|