Summer-month lean hog futures extended their losing streak to seven weeks this week under pressure from demand concerns, ample hog supplies and technically driven selling, but did find support at midweek. More deferred contracts accelerated lower early in the week, with Dec. futures hitting a 6-month-plus low amid expectations for burdensome Q4 supplies before stabilizing.
The large premiums summer-month futures once held to the CME cash lean hog index have evaporated and futures are now closely aligned with the index. It is concerning Aug. futures have gone slightly discount to cash. Cash hog prices have been stable though since mid-April, with the index moving sideways between roughly $90 and $92. Wholesale pork prices have also been stuck in a narrow range since early April. But the market is now facing supply pressure – this week’s pork production ran 4.0% above a year earlier with higher slaughter weights adding to output.
Meanwhile, there continues to be uncertainty on the demand side. As noted on page 4, the recent plunge in the value of the Mexican peso versus the dollar has eroded the buying power of top U.S. pork customer Mexico. Still, hog futures have built in a lot of bearish news over the past seven weeks and we suspect they may be close to putting in a significant low.
Additionally (and not in the print edition), as we have been discussing for several weeks now, the COT picture was a great heads up for the selloff going back to mid-late April. That unwinding of the large spec net long has been wicked, and continues to do so. Frankly, considering the size and speed of the sell off, prices have hung in there relatively well. Commercials have returned to their ‘average’ historical position, and large specs are net shorter than ‘average’. Between that and technical support, we anticipate this move is likely over.
The overall chart picture for lean hog futures remains solidly bearish with futures locked in steep downtrends. Futures are clearly oversold on a technical basis and have established price support since Wednesday. But the same thing happened last week and after jumping to a six-session high on Monday, most-active July lean hog futures quickly reversed lower and sold off to a five-month low. Nearby support for July futures is now at $91.80, with key long-term support at $89.63-$89.88.
Hedgers’ Strategy: Hedgers are short July futures on 25% of Q3 marketings and sold Oct. futures on 25% of Q4 marketings on Wednesday. Be alert for recommendations to lift next week.
