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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 - 10-16-08 - Grains rebound but hogs are still sliding.

Oct 16, 2008

Hog Comments - 10-16-08 - Grains rebound but hogs are still sliding.

Jeremy Knutson

Dec '08 had another one of those openings where you think, man I wonder how fast we will hit limit lower today.  Well, it threw a curve-ball today and actually performed quite well.  The market didn't seem to follow the Dow Jones as much as it has the past couple of days.  The Dow Jones has rallied into its close by approximately 500 points from where it was at when corn closed.  The Dow rally would suggest better trade tonight and tomorrow for Dec '08 corn. 

It will be interesting to see how the trade treats tomorrow as it is Friday and we are headed into the weekend.  It was also interesting to see the buying come to the market this afternoon for the second day in a row.  I said yesterday that I thought Dec '08 corn would reach $3.75 either last night or today; we touched $3.71 today and bounced off of it.  This is encouraging to me because thus far we have held support.  Again, as I stated yesterday if we close the market below $3.75 for a day or two, it shouldn't take long to reach $3.25 Dec '08. 

Bottom line - The last two weeks we have closed on our low for the week and we are currently $.13 1/2 off of our low this week.  I expect the corn market to have buy stops above todays high of $3.91 3/4, buying this market on a Friday would be VERY aggressive and I don't recommend it.  If the buying does come and we have a good weekly close and we can get follow through buying next week a target to the upside would be $4.21 but for now we should see resistance at $4.00 and support at $3.71.  We NEED to close above $3.71 tomorrow otherwise I think $3.25 is in our future.  I expect corn to trade better tonight and tomorrow,  I think we could touch some buy stops around $3.92 tomorrow.

Dec '08 meal was the leader of the pack today, it was the commodity that started the rally in the grains today.  The Dec '08 contract looks pretty good on a weekly basis right now, the only problem is the weekly chart isn't complete without a Friday close.  I need to see how we close tomorrow before I will say we could reverse.  I will say MAKE SURE YOU HAVE MEAL COVERAGE IN PLACE with options if you don't already.  This downward move in the market is a tremendous gift and we shouldn't let it pass us by. 

I really need to see the weekly chart tomorrow afternoon but it sure looks encouraging as of todays close.  This could all change tomorrow and that is why I am saying use options, it still gives you the downside if the market chooses to move lower yet.  I still have support around $229.00 in the Dec '08 but first I have support at $244.90 for tomorrows session.

Bottom line - I am not saying we have reversed just yet but like the action we had late in the session today.   I expect the market to open a little higher tonight and possibly retrace back to $249.00 or so but I expect a firm day tomorrow unless we have a major fallout in the Dow Jones again, then all bets are off.

Dec '08 hogs didn't do exactly what I thought they would do today with cutout being down $2.96 yesterday.  I thought we would touch limit lower today at some point but we never did, we only got as low as $55.90 in the pit which was $2.17 lower but the electronic trade was $2.62 lower at one point.  We are toward the lows of the week based on today's close so we could see a little bounce in the market tomorrow. 

Even if we bounce tomorrow I think we will be met with selling if we get high enough because the fundamental picture still isn't that rosy.  We don't have the Dollar weakening right now and the packers are pretty much bought up for next week and some even through the end of the month.  I am not getting excited about a big rally here, I feel there will be some short-covering tomorrow because it is Friday and the market closed today on near the low of the week.  Cutout was up $1.11 today and cash varied in price but was mostly $1.50 lower or so.

Bottom line - I expect hogs to trade slightly higher tomorrow based on higher cutout and the packers gaining more of their margin back.  I also attribute a small rally to possible short covering going into the weekend.  If we were to get crazy to the upside tomorrow I would say we could reach $57.30 which will probably be met with selling.

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
10/16        70.8      65.22   88.92   69.54  46.80  91.40 47.47  74.75
Change :                1.11    1.48    0.23   2.63  -0.24 -0.58   3.74

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 :  1.52 lwr   :  1.66 lwr   :  1.68 lwr   :  1.37 lwr
Negotiated      :             :             :             :
CARCASS BASIS   : 53.00-62.09 : 54.50-62.09 : 54.50-62.09 : 53.00-61.50
185 lb Base Hog :   wtd avg   :   wtd avg   :   wtd avg   :   wtd avg
Plant Delivered :    59.33    :    60.17    :    60.33    :    58.12
Head Count      :   22,529    :    7,738    :   12,363    :   10,144

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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