I’m always amazed at retailers as they watch a hog market rally. There is always a rush to cover out-front needs in case futures and product continue higher. We put a large $2.54 on product Friday and are now a whopping $9.33 higher for the week! I believe this is a 1-week record for pork product.
In the last seven weeks, we have advanced pork product 22.6% higher and taken the pork composite average from 20% under last year to just 1.7% under last year. An extreme rally of this size will start to see daily/weekly wholesale pork product value to slow. Last week we moved 349 loads of pork and this was almost 22% under the previous week.
Pork processors put $3 to $5 on cash hogs last week, but found their operating margin declining by 14% as they went home Friday with a negative $15.44 against a negative $3.56 last year and positive $7.82 in 2010.
Traders know we are pricing ourselves out of retailer interest, partly because they have allowed a decline in the July futures premium to the lean hog index; it was a positive 748 points two weeks ago and on Friday, the discount was just 119. This goes against a 197 premium last year and a 5-year average premium of 149. A discount of this small size will not influence trading this week.
This should be the high week in hog futures into mid-July or longer. We have a strong seasonal correction in the lean index that usually starts the last week of June. Traders always anticipate this (!) and will not be late week buyers. Whatever we can put on futures today and/or tomorrow should be the near-term top.
Buying hog futures later this week is for clowns, fools and jugglers.
The lean hog index was 509 higher last week and closed at 9421. It is being calculated at something close to 9730 by Wednesday. As I write this, we have July trading 9552, or just 178 discount to where Wednesday’s lean index should be. For this time of year, and extreme product rally that no one saw coming, a 100- to 300-point discount is probable as traders think the product top is sometime this week.
If you did get short July hog futures in the 9345 to 9500 area, I would raise the buy stop from 9537 to 9567 and make July futures trade over 9567 for more than two hours. There is a small chance we could close limit-up today, at 9602, so be sure and have a stop in the market. We are short in the correct technical area, but are watching a pork product rally that no one saw coming.We look to come out of this week short July and/or August hog futures. Finding the top this week will be the game. Like cattle last week, it’s coming.
Cattle futures were 372 lower last week in June and 417 points lower in August. Daily/weekly cattle demand-side fundamentals were decent but nothing special. Choice boxed beef was a tiny 17 cents lower Friday and down a small $1.06 for the week. Select was 85 cents lower Friday and down $1.54 for the week. Last year, choice boxed beef was $1.39 higher for the week with select $2.90 higher.
Choice boxed beef is now at $198, and with the high for the year at $198.80, traders worry that seasonal pressure is coming in boxed beef and that this, in turn, will see cash cattle break back into the $112 to $115 area (went home Friday at $118 to $119.) This psychological worry gave the 400-point break in futures last week; traders know June and July are the worst two demand months of the year.
I don’t know anything else to talk about in cattle. We are short two units of June cattle futures as we wait for the normal seasonal correction that started last week to continue into mid-July or later.
From a technical bar chart perspective, June cattle futures will find light chart support in the $114 to $114.60 area with major support in the $111 to $111.50 area. We will need a 2- or 3-day rally to add a third unit.
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PFGBEST Research Team