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The Lean Hog Perspective

RSS By: Jeremy Knutson

This lean hog and feed commentary contains thoughts from Jeremy Knutson, a commodity broker with Hurley & Associates.

Hog & Corn Comments - 09-26-08 Neutral to bearish hog report. Or is it?

Sep 26, 2008

 Hog Comments - 09-26-08 Neutral to bearish hog report. Or is it?

 
Jeremy Knutson
1-877-212-2564
jknutson@hurleyandassociates.com

I made it through my wisdom tooth "surgery" yesterday and to my delight it wasn't that bad!  I would have to guess that I am one of the luckier ones who doesn't experience much pain.  Maybe I shouldn't count my chickens but so far so good.  

CORN
Corn threw me a curve ball today, I expected lower trade but I thought $5.49 or so would stop the market but instead it was $5.39 1/4 instead.  Dec '08 corn settled at $5.43 which is exactly 62% of the way back to our most recent low of $5.24.  The thought on the floor is mostly attributed to the Government bailout program that the lawmakers are having political war with.  It is interesting to watch CNBC and listen to each side bash each other and literally call the other side liars.  I guess my wife's Kindergarten class is nothing compared to Congress.  : )  I am not trying to make light of the gravity of the situation because it is a big deal; it is just comical to see how emotional and childish some can get in times of great pressure and stress.

As usual today was not much different than the last week and a half, I didn't hear much about the fundamentals of the corn market, it was mostly about the outside markets.  It is my understanding that if the "bailout" package isn't passed by Sunday night prior to the Asian markets opening, Wall Street and the commodities sector could be in for a "major sell-off" according to some analysts.  Most analysts, news contributors, Congressmen, Senators and even President Bush seem to think something will be in place prior to the Asian market open on Sunday evening.  I would agree it's too big not to have something done. 

As I said earlier I expected corn to be weaker today but not by $.15 1/4.  We closed at the 62% retracement level today and I would expect the market to respect this level on Sunday evening and Monday.  It is tough to call next weeks action because of the uncertainty with the bailout plan but I think something is coming so I believe the market will be firm.  I said last Friday that I thought this week would provide better trade and it did for most of the week only to close lower today and take back most of the gains.  I can still say I nailed that call by 3/4 of a cent which is how much higher the market closed this week over last weeks close.  Big whoop.

Bottom line
- As I said earlier I believe the Government will come through with some type of package which will be supportive the market.  I expect the market to open better on Sunday night and have a better week next week because I didn't get what I was looking for this week.  I expect a test of $5.55 1/2 to $5.59 but it wouldn't surprise me to see the market march right back toward $5.74.  We had an inside week this week and we should trade in the direction of a breakout next week, meaning if we make a new low and close below it a day or two we should continue lower.  The same would go for closing above this weeks high, if we do we would trade higher from there.

 

MEAL
Dec '08 soybean meal didn't stand a chance today with the soybean and corn markets as weak as they were.  Crude Oil didn't help matters any either.  The Dec '08 contract settled at $320.70 which is just below the 62% retracement level of the most recent low of $311.70.  I would like to see the market trade back above the $321.30 and ultimately $324.20 to consider another shot at $336.20.  I am still hedged on a great deal of soybean meal at $350.00 which is the last entry point for my purchases but with equity that we have kept from other hedge positions, our average is around $300.00 Dec '08 futures.

You must wonder why I always talk like I want the market to move higher.  I usually talk that way because I have a hedge position on.  If you are hedged and you are managing your risk you really shouldn't care which direction the market moves.  I don't care which direction the market moves because I am hedged but I need to talk about the market moving and the direction I am looking for it to move is to the upside which is why I talk like I want the market to move higher.

I have been hearing average to below average soybean yields coming in from various areas throughout the Midwest.  I would say most of them are coming in slightly below expectation.  I will use the disclaimer that these are isolated reports with no scientific formulas to support an overall estimate of U.S. crop size.  Take what I am saying with a grain of salt because we have a lot of harvest to go.

Bottom line - I expect meal to be higher next week just like I do in corn.  I feel like a large move in soybean meal and in soybeans is just around the corner, and from what I am hearing from the countryside the early disappointing yields will support this idea.  I don't see the market getting below $300.00 and if it should I don't think it will be there for very long.  If Dec '08 goes below $311.00 and then trades right back above it next week, it would be a huge buy signal around $312.00 on the weekly charts.  We would NEED to make new lows below $311.00 first for this signal to be good.  We also have the Quarterly Stock report out on Tuesday the 30th at 7:30 AM CST.  MAKE SURE YOU HAVE CALLS IN PLACE ON MEAL!!!!

 

HOGS
Dec '08 hogs traded steady to better very early in the trade today only to sell off by $.90 or so and then come back to almost unchanged at the end of the session.  The Quarterly Hog & Pig report was out today at 2:00 PM CST which was bearish the front and neutral to friendly to the deferred months.  If you ask me I would say the market already knew this information and has already traded it.  I would expect sell the rumor and buy the fact for this report on Monday.  I think this report could very well be what the market needed to find a bottom in hogs.  Man this is stupid to say on a blog for the entire world to read but it is my honest feeling.  I am not saying lift your hedges by any means; I wouldn't be against buying calls or rolling down put options if you have them.  

I cleaned up my accounts over the last couple of days.  I basically turned my hedges into a synthetic put (a synthetic put = short futures + call option) options yesterday and today because of the big move lower we've had in the hog market over recent weeks and the futures price risk (as I see it) is to the upside right now.  I don't want to give back all the equity we made in our short hedges on the way down from the mid-70's levels in Dec '08 which is where I have all of my hedges right now.

The report today is being viewed by many as neutral to bearish, I agree, that is what the report says if taken at face value BUT I don't know as though the market will treat it that way.  Dec '08 futures have traded below $66.05 eleven of the last fourteen sessions and have only managed to close below this level two times.  This is a very good support level and I think we may trade the negative side of the report for the first hour or two on Monday and then work higher the rest of the week.

Again, please don't make marketing decisions based on the opinion I have just given because it is just that, my opinion.  Like I said in my meal comments, if you are hedged and you are managing your risk you shouldn't care which direction the market moves.  I don't at this point because I am positioned to gain either way.  My feeling is also based on my experience; I don't have any major technical indicator telling me to go long the hog market.  Actually the Dec '08 contract is in a sideways range between $64.22 and $67.67.  When we break out of this sideways range either to the upside or downside, we should have a big move.

Bottom line - I like the fact that we have traded 11 of the last 14 days below $66.05 and have only managed to close below this level 2 times.  That is pretty good support.  I expect the early part of the week to be slightly lower and then firm as the week progresses.


HOG & PIG REPORT HIGHLIGHTS

U.S. Hog Inventory up 2 Percent

                                                                               

U.S. inventory of all hogs and pigs on September 1, 2008 was 68.7 million

head.  This was up 2 percent from September 1, 2007 and up 1 percent from

June 1, 2008. 

                                                                               

Breeding inventory, at 6.05 million head, was down 3 percent from last year

and down 1 percent from the previous quarter.  Market hog inventory, at

62.6 million head, was up 3 percent from last year and up 2 percent from last

quarter.

                                                                                

The June-August 2008 pig crop, at 29.3 million head, was up 1 percent from

2007 and up 10 percent from 2006.  Sows farrowing during this period totaled

3.08 million head, down 2 percent from 2007 but up 6 percent from 2006.  The

sows farrowed during this quarter represented 51 percent of the breeding

herd.  The average pigs saved per litter was 9.51 for the June-August 2008

period, compared to 9.29 last year.  Pigs saved per litter by size of

operation ranged from 7.80 for operations with 1-99 hogs and pigs to 9.60 for

operations with more than 5,000 hogs and pigs. 


U.S. hog producers intend to have 3.01 million sows farrow during the

September-November 2008 quarter, down 5 percent from the actual farrowings

during the same period in 2007, but up 2 percent from 2006.  Intended

farrowings for December 2008-February 2009, at 2.98 million sows, are down

3 percent from 2008 but up 3 percent from 2007.

                                                                               

The total number of hogs under contract owned by operations with over 5,000

head, but raised by contractees, accounted for 43 percent of the total U.S.

hog inventory, up from 40 percent last year.



                                                                               

           Farrowings:  Number of Sows, Pig Crop, and Pigs per Litter,         

                           United States, 2006-2009 1/                         

--------------------------------------------------------------------------------

                :         :         :         :         : 2008 as % of  : 2009 

      Item      :  2006   :  2007   :  2008   :  2009   :---------------:as % of

                :         :         :         :         : 2006  : 2007  : 2008 

--------------------------------------------------------------------------------

                : ------------ 1,000 Head ------------     ----- Percent ----  

                :                                                               

Sows Farrowing  :                                                              

  Dec-Feb 2/ 3/ :  2,841     2,905     3,071     2,983     108     106     97  

  Mar-May       :  2,927     3,033     3,092               106     102         

  Dec-May 2/    :  5,768     5,938     6,163               107     104         

                :                                                              

  Jun-Aug       :  2,912     3,132     3,076               106      98         

  Sep-Nov 4/    :  2,949     3,180     3,006               102      95         

  Jun-Nov 5/    :  5,862     6,312     6,082               104      96         

                :                                                               

Pig Crop        :                                                              

  Dec-Feb 2/    : 25,662    26,396    28,388               111     108         

  Mar-May       : 26,580    27,896    29,000               109     104         

  Dec-May 2/    : 52,242    54,293    57,388               110     106         

                :                                                              

  Jun-Aug       : 26,519    29,094    29,251               110     101         

  Sep-Nov       : 26,857    29,511                                             

  Jun-Nov       : 53,376    58,606                                             

                :                                                               

                :   ------------- Number -------------     ----- Percent ----  

Pigs per Litter :                                                              

  Dec-Feb 2/    :   9.03      9.09      9.24               102     102          

  Mar-May       :   9.08      9.20      9.38               103     102         

  Dec-May 2/    :   9.06      9.14      9.31               103     102         

                :                                                              

  Jun-Aug       :   9.11      9.29      9.51               104     102         

  Sep-Nov       :   9.11      9.28                                             

  Jun-Nov       :   9.11      9.28                                             

--------------------------------------------------------------------------------

1/  May not add due to rounding.                                               

2/  December preceding year.                                                   

3/  Intentions for 2009.                                                       

4/  Intentions for 2008.                                                       

5/  Actual farrowings for June-August plus intentions for                      

    September-November.                                                        

                                                                               

 

                                                                               

 

 

USDA ESTIMATED PORK CARCASS CUTOUT
Based on FOB Omaha carlot pork prices and industry yields.

           Calculations for a 200 lb Pork Carcass
        53-54% lean, 0.65"-0.80" backfat at last rib
-----------------------------------------------------------------------
         Total                   Today's Primal Cutout Values
Date     Loads      Carcass    Loin    Butt   Pic     Rib   Ham  Belly
-----------------------------------------------------------------------
09/26        43.5      74.23   89.00   74.33  56.23  87.82 71.99  83.23
Change :               -0.52   -1.34    1.29  -0.99   0.64 -1.35   0.88
-----------------------------------------------------------------------

National Direct Hog Price Comparison

--------------------------------------------------------------------------
                :  National   :    Iowa     :   Western   :   Eastern
                :             :  Minnesota  :  Cornbelt   :  Cornbelt
--------------------------------------------------------------------------
   Base Price is the price from which no discounts are subtracted and
   no premiums are added.
--------------------------------------------------------------------------
BARROWS & GILTS :   .24 lwr   :   .61 hgr   :   .31 hgr   :   .16 hgr
Negotiated      :             :             :             :
CARCASS BASIS   : 61.00-74.00 : 62.00-74.00 : 62.00-74.00 : 61.00-71.62
185 lb Base Hog :   wtd avg   :   wtd avg   :   wtd avg   :   wtd avg
Plant Delivered :    70.45    :    72.07    :    71.85    :    68.08
--------------------------------------------------------------------------
Head Count      :   26,284    :   13,142    :   16,545    :    9,739
==========================================================================


Hurley & Associates believes positions are unique to each person’s risk bearing ability; marketing strategy; and crop conditions, therefore we give no blanket recommendations. The risk of loss in trading commodities can be substantial, therefore, carefully consider whether such trading is suitable for you in light of your financial condition. NFA Rules require us to advise you that past performance is not indicative of future results, and there is no guarantee that your trading experience will be similar to the past performance.

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