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(September 23, 1997) HOGS: At the end of each quarter the United States Department of Agriculture (USDA) releases a Hogs and Pigs report. In my opinion, the USDA Quarterly Hogs and Pigs report is the best indication of current and future hog supply. The report consists of three main numbers: all hogs and pigs, hogs kept for breeding, and market ready hogs. The first is an indication of current hog supply, the second (and most difficult to predict) is an indication of forward hog supply, and the last is an indication of demand.
Published expectations for the report due for release on Friday, September 26th are relative to last year and are as follows:
All hogs and pigs, 3.0% to 4.3% increase
Hogs kept for breeding, 2.0% to 5.2% increase
Market ready hogs, 3.0% to 4.5% increase
In summary, the hog industry uniformly believes that supply is expanding and price will decline. There is, however, some disagreement as to how much.
In my opinion, a 4.0% (average expectation) increase in the breeding herd number should translate into a 64- to 65-cent lean hog value in January or February. The February lean hog future is currently trading between those two extremes.
I believe the hogs kept for breeding number will increase by 3.0% or less. In this instance, February lean hog futures would be undervalued. The magnitude of any potential rally from this undervaluation, in my opinion, also depends on how speculators are positioned (i.e., short).
Remember, however, that the USDA is indicating hog expansion. Therefore, I believe any rally will be short lived as increasing supplies provide resistance on rallies. Therefore, I believe short-term opportunities to position long will eventually give way to longer-term opportunities to position short.
Technically, February lean hog futures have returned to a congestion area and previous price lows formed in January through March and June of this year.
In my opinion, congestion areas often provide support. If February lean hog futures hold near 64 cents, I believe a rebound near 68 cents is possible.
Additionally, I believe a descending triangle formation has been developing for the past 6 months with support near 64 cents and resistance near 68 cents.
In my opinion, a descending triangle formation often indicates a market top. In this instance, I believe a failure near 68 cents and a penetration of support near 64 cents will eventually lead to additional price declines.
Nonetheless, I never underestimate the potential for prices to penetrate either boundary. If, for instance, resistance near 68 cents is penetrated, a return to contract highs near 70 to 72 cents is not unrealistic. Remember, current cash hog values remain above 70 cents.
In the event of a return to contract highs, I believe a large trading range will develop with boundaries near 64 cents and 72 cents.
Mike Peifer
IRA EPSTEIN & COMPANY
223 West Jackson, 7th Floor, Chicago, Illinois
(September 24, 1997) HOGS: As you are probably aware, the USDA will release their Quarterly Hogs and Pigs report Friday, September 26th at 2:00 p.m. CST. Most traders are expecting a bearish report. I believe lean hog futures trading has priced in an increase to this country's hog numbers and will be looking for confirmation from the report. Also most traders will be looking for an increase in the pig crop. The average estimate of all hog and pigs is 103.8% of a year ago. The average estimate of sows kept for breeding is 103.6% of a year ago. Most traders will be expecting sows kept for marketing at 103.8%. The breeding herd may be the key with this report. There has never been an increase in the breeding herd from the June to the September report. For the farrowings and farrowing intentions the average estimate is at 104.4% of a year ago for the June through August crop, 105.3% of a year ago for the September to November crop and 105.8% of a year ago for the December through February crop. Trading is thin and volume is low as traders appear to be squaring positions before the report. Hence, unless you are extremely aggressive, I am recommending a position on the sidelines until next week.
Les Jones
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