The Lean Hog Perspective
This lean hog and feed commentary contains thoughts from Jeremy Knutson, a commodity broker with Hurley & Associates.
02/13/13 - Hog Margin Management In Volatile Times
Feb 13, 2013
Since 2008, commodity prices have become extremely volatile and thus managing hog margins
has become equally as volatile. I look at markets and see feed prices moving lower as hog prices tag along, and I think to myself, we still have our most volatile time-frame ahead of us.
What are some things to consider with the upcoming growing season and the volatility it typically brings?
· One is the drought monitor which still has significant dryness in the western cornbelt and mostly normal conditions in the far east. This is Feb 7th 2012 vs. the most recent 2013 run.
· The shortage of wheat in Russia due to weather. They will remove the 5% import tariff on wheat because of their said problems.
· Chinese soybeans are still being consumed at a progressive clip
· Brazil’s poor infrastructure is backing up delivery of product for export up to 30-40 days
· Seasonal fund buying is just around the corner in the feed market
To me, one of the things that can move the market the fastest and create the most volatility is the managed fund money. The CFTC provides a report to the public each Friday afternoon with and update on position levels for several trader categories and one of which is managed money.
Below is the some of the information from last Friday’s CFTC commitment of traders (COT) report. The only number that was listed on the report is the "on 2/5/13" number, the 5 year high and low are based on me looking back over the last 5 years. The positive numbers mean long the market and the negative numbers are short the market.
Commodity on 2/5/13 5 yr. high 5 yr. low
Corn +182,967 +429,189 -20,856
Meal +45,825 +101,618 -28,150
Hogs +42,825 +80,349 -15,971
Now that you know what the length in the managed money is for each commodity involved in the hog crush, what does it mean? It doesn’t really mean anything by itself. Commodities markets process information that way it deems fit, not the way we may think is rational or logical. What I do for reference purposes is take a look at where the managed money was during the same week from previous years to give me an idea if they have a rather large or small position for this time of year.
The graphic below shows where the managed money positions were as of 02/05/13, highlighted in yellow. The 2013 highlight shows me where this year’s position is compared to the same report time-frame from prior years.
In the chart below you will notice each commodity has a percentage above its column bar. This number represents the percent of time, over the last 5 years, that the managed money funds had a SMALLER position in place than it currently has in place according to the last CFTC COT report.
Does all of this fund money talk actually go into the managing of a hog crush on a day to day basis? Probably not from a day to day standpoint but the market will always process the data. I hear a lot that the funds are horrible and they should be banned from the market place. I understand the gripe but I disagree because they tend to over extend the market in either direction. This over extension is providing a hedger, whether end-user or grain producer, an opportunity. The thing is you have to be watching for it.
Managing hog margins has become a task that requires more attention to detail on a longer time-frame that it used to. Opportunity is usually available at some point during the year; however, that opportunity might come a year out. There are many different producer situations where this may or may not be a true statement on an individual basis. I’m looking at it from the relationship between hogs, corn and meal which is commonly known as the hog crush.
The crush changes just as each commodity the makes it up does; however, there isn’t any quote service available to provide it to us. Monitoring the crush margin takes time and work, it isn’t the easiest but it is something that can help take the emotion out of "timing" a decision in a given market. Following one number (crush) is a lot easier than following three numbers independently.
There are firms out there that can help with monitoring a crush margin, ours included. If you don’t already have a crush margin following system in place, find someone who does. We watch this information daily and look for opportunities should they present themselves. If you would like to see an example of our Daily Hog Crush Report, click here .
If this is a philosophy that you’re interested in and would like to visit more about, send me an email at email@example.com give us a call at 1-877-212-2564.
The trading of derivatives such as futures, options, and swaps may not be suitable for all investors. Futures and options trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Any reference to past performance is not indicative of future results. All observations of economic, political and/or market conditions are not intended to refer to any particular trading strategy, promotional element or quality of service provided by Hurley & Associates, Inc. and should be construed as market commentary. All recommendations to buy or sell a specific derivative or forecasting statements regarding market activity and the pricing thereof should be construed as a solicitation in any jurisdiction in where such an offer or solicitation would be legal. Proper context and guidance including but not limited to the particular trading objectives, financial situations and the needs of the intended audience were taken into consideration when this recommendation was prepared. Contact your account representative for specific advice to meet your specific trading preferences or goals. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by Hurley & Associates, Inc. Sources of information believed to be reliable were used in preparing such observations, and no guarantee or representation regarding the accuracy of those sources has been made. Hurley & Associates Inc. is not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material.