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312-441-6000(November 24, 1999) HOGS: Lean hog and frozen pork belly futures have enjoyed stronger prices since early November. Outstanding demand for pork along with expectations of reduced pork production in the coming weeks has fueled an impressive rally in futures. Spot month December hogs have rallied from 4450 to test 5170. February bellies have surged from 5980 to test 7725. Both markets made these respective moves in just two weeks. While front month lean hog futures are carrying some premium to cash, the current basis does not necessarily suggest undue bullish enthusiasm for the near-term market. Reduced slaughter, coupled with strong demand for pork, could easily result in lean hog and pork belly prices trading to much higher levels into next year.
Lean hog prices this month have rallied from 45.00 to 51.00 in two weeks. Slaughter levels a few weeks ago appear to have peaked above 2,050,000. Fourth quarter slaughter has been running ahead of levels forecast from the most recent USDA report released in late September. The numbers though have tightened slightly in recent weeks and there is a good chance that by mid December weekly hog slaughter will drop below 1,950,000. Average weekly slaughter is expected to be near 1,940,000 in January, with February back at 1,870,000.
Slaughter levels will be watched closely over the next few weeks. Signs of greater than expected supply would be viewed as bearish given the recent upturn in lean hog prices and futures values holding premiums to the cash. Traders still remember the debacle that characterized the trend in cash hogs and futures prices last year at this time when the market fell to historically low levels. Another week or two of 2,050,000 plus slaughter in mid December would probably be enough to send lean hog prices back to 45.00-44.00 in short order. Lean prices the week ending 11/20 were 49.00. The next big support level for lean hogs is 40.00. I believe the cash lows are in for some time. Lean prices for hogs can trade up to resistance at 55.00 over the next 4-6 weeks if slaughter declines as expected. Prices at 56.00 or higher would point to a move testing the 65.00 level!
Demand for pork since September has been better than expected. Consequently, the cash hog market was spared the sharp sell off that many had anticipated despite high levels of pork production. Improved demand for pork can be traced to different factors. The strong U.S. economy has fueled more aggressive hotel, restaurant, and institutional interest in beef and pork this year. Dietary acceptance of red meat as opposed to the belt-tightening trend away from beef and pork in the early to mid 90's has probably played a supportive role. The USDA food aid package to Russia that included sizeable shipments of pork cuts was also a positive influence. Fast food restaurants have included bacon in many sandwiches to the point where expected supplies of bellies into cold storage have been far less than the trade had anticipated. The results of the USDA October monthly cold storage report showed frozen belly stocks at 22.48 million pounds. This was much higher than expected and may result in February bellies falling back to 70.00-67.50.
Setbacks in the lean hog futures should be used as buying opportunities. December hogs should hold at 4995-4955. There is additional support at 4820. Use a close only stop at 4820 for protection. Upside potential for December hogs is 5450-5500. February hogs have support at 5250-5200. Use a close only stop at 50.00 with long positions. The market can trade back to 55.00-56.00. If December hogs fall back to 400-450 point discount to the February hogs look to get forward spread. Risk a close through 550 discount. The spread could narrow back to 100-even money. February bellies should widen further against the February hogs.
Phil Stanley