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COMMODITY REVIEW AND OUTLOOK
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(August 14, 1997) HOGS: October remains at a discount to the cash market, which could provide support on dips. Weights continue to suggest that those waiting for more hogs will be disappointed. There is also talk of a firmer pork product market. The fact that selling dried up on recent lows also encouraged a bit of buying. There are still concerns that the cash market will soften further, based on the idea that hogs are backing up, but thus far there has been no evidence, either from numbers of hogs to market or heavier weight hogs. The market remains focused on the prospect of increased hog numbers down the road, but don't forget that was the perspective prior to the last report, which showed that contrary to expectations, expansion has not occurred. It may be that the hog numbers awaiting their ultimate destiny as pork chops just aren't there. The potential for Japanese purchases is a bullish factor.
Longer-term traders should be aware that Taiwan had a serious outbreak of disease in the hog herds earlier this year. This forced them to liquidate their hog herds, and forced their buyers, Japan and Korea most notably, although many of the Asian countries also bought from them, to seek pork elsewhere. The U.S. is a high quality reliable supplier, and is likely to be a primary beneficiary of any Japanese buying. As an added aspect, the Dutch are planning to liquidate 25% of their hog numbers due to disease in their hog herds. Long term, things look fairly positive for hogs.
RECOMMENDATION–Choppy action in October hogs is continuing to be the dominant feature. The overall chart pattern suggests a double top. Support is seen near 7160 and 7070. There is a gap at 7392-7350. Resistance lies near 7300, 7345-7350, 7392, 7575-7600, and 7635-7660. Aggressive traders might play the range for now. Buy October hogs on a test of the upper 7100's, lower 7200's with stops under 7070 or of 50-100 points, and sell a rally the 7300 area if aggressive, the upper 7300's if more conservative. More conservative traders should wait out the rally and sell in the mid-upper 7300's with stops of 100 points or so. Calls are relatively cheap, and could offer good potential upside if the Japanese buy.
M. Steven Morgan
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