Hogs closed higher today on moderate volume.  The cash markets were weaker across the board as well as the pork cutout.  As you can see in the graph below, the amount of time the cutout has spent below $86.32 is around 28.8% of the time in the last 2 years and around 64.6% of the time in the 5 year.

To see a more extensive set of charts and figures click here

The only issue I see with the 2 year history is that the seasonal tendency of the cutout has us moving lower for the foreseeable future.  With the large cold storage stocks that we have and the amount pork being produced and Labor Day just around the corner, I would tend to agree that we should continue to see pressure.

Pork meat production is up 2% over last year on an YTD basis.  Last week we produced 7.2% more pork than we did during the same period last year and 4.5% more than last week.   More production, rather large stocks and seasonal weakness doesn’t provide a good nearby outlook for the hog market.

The one thing we do have working on our behalf is the basis levels are extraordinary right now and would suggest that either the cash market has to drop or the October 2012 futures are very undervalued.  I’m of the opinion that we have cash too high at the moment.

I’m not a big believer that the Oct ’12 hog contract falls out of bed either but I do think it will gain on the Dec ’12 contract.  I believe the Dec ’12 hog contract will be the short side of bear spreads as traders look for a safe way to play the long side of the 2013 market.  This is just my opinion.

To see a more extensive set of charts and figures click here

When you step back and look at all of the seasonal tendencies the pork cutout has along with the hog index, it doesn’t paint a very pretty picture for the 4^th quarter of 2012.  Things currently look better in the 2013 timeframe from May forward but could still use some additional profit.  The cash hog market is probably going to get it the worst, as for the futures market, I think we could see one more leg down before finding a bottom in the 4th quarter.

If you need hard to find, fundamental and seasonal information for the pork industry, click here to get a sample of our Daily Hog Report.

Hurley and 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 past performance.

FOLLOW ME ON TWITTER.  WWW.TWITTER.COM/LEANHOG 

Demand Destruction

The estimate on where corn demand is cutoff is currently a major debate.  Some feel demand destruction is taking place while others think that $9-$10.00 corn prices will be needed to effectively cut off demand.  I am in the buoyant camp.  I think that the $8.00 futures level in corn is an area where we see resistance in the market and the $6.50-$7.00 area is where we find good support and trade within this range while the market further assesses the crop size.

Ethanol Margins

Ethanol plants have negative margins based on the information the CME Group distributes as well as some other proprietary groups that we get information from.  Some argue that they are not losing money but on the same token, some plants have shut down and capitalism would suggest that you don’t shut down something that is making money, assuming it is your main source of revenue.

Hog profitability

Hog producers that haven’t hedged anything for at least the 4^th quarter of 2012 are losing their shirts right now.  It’s the worst the crush margin has been in the last two years.  Once you get beyond the FH February delivery time-frame in 2013, the crush margins begin to stabilize and eventually go positive in LH April THROUGH the end of the year in 2013.  The hog market has priced in higher priced feed as well as some liquidation in the hog industry.

Below is a seasonal chart of the lean hog cash index and as you can see we are near the end of seasonally higher cash prices.  The red line is the current year activity.

I’m not an optimist for the remainder of 2012 unless we hit a major run in exports, however, I’m friendly the 2013 market starting near the end of the 1^st quarter.   

U.S. crop size discussion

My opinion is that the lowest yield estimates for 2012 have been made.  If you look back to 1988 and 2002, we have our lowest estimates in the Aug USDA crop production report and the yields moved higher from there.  This can be deceiving in a sense because the yields could go up and the harvest acres go down, therefore still reducing the crop size.  The market chatter should begin to switch solely to production size and away from yield.  Harvested acres are the moving target now in corn.

Managed Money

Managed money is the group that will probably scratch our heads moving forward.   You will notice in the corn market that we bottomed around the 23^rd week of the year and rallied very strongly into the current time-frame.  When the "funds" (managed money is one of 5 categories the CFTC tracks) decide they want to take the profit on these positions they will sell the market off and we will be wondering why because of short supply.

The funds don’t make money with a futures position if the market is stagnant, it needs to move.  If they decide to sell it could cause a snowball effect and push the market a lot lower than it fundamentally deserves to go.  This should allow for the end users to come back into the market and buy coverage to allow them to lock in profits for the deferred time-frame and start the entire cycle over again.  I’m making these statements on deferred profits based on the hog industry.

If you have any thoughts or comments, I would enjoy hearing them.  Email me at jknutson@hurleyandassociates.com

 www.leanhog.net

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.