Price action: August hog futures rebounded from Monday’s big losses, climbing $1.50 to $96.275, whereas deferred contracts were mixed.
Fundamental analysis: Sustained cash strength likely boosted the nearby August lean hog contract Tuesday. The CME hog index for last Friday was officially quoted at $101.60 today, matching the 57-cent advance indicated by the preliminary calculation. Monday’s preliminary figure posted a 93-cent jump to $102.53. The fact that the rise easily exceeded the gains posted the previous two sessions likely made traders rethink the discount built into the August contract and caused them to buy the discounted contract rather aggressively. It still ended the day over $6.00 below the cash equivalent, showing the market still anticipates considerable weakness to prevail before its August 14 expiration.
Traders are probably correct to anticipate a seasonal downturn, but we’re not convinced the likely summer peak will come as early as they expect. Our optimism stems from the BLS report indicating grocers had cut retail bacon prices by almost 16% annually during June; we expect similarly large YOY cuts in July, which implies vigorous bacon consumption and sustained support from that cut into early August. Retail price reductions for the other grilling cuts also seem likely to boost consumer demand, whereas slaughter will probably remain near annual lows over the next few weeks as well.
A sustained rally and/or firmness in wholesale pork prices will likely be required to support continued gains in hog prices. Pork cutout did edge up 41 cents to $113.12 at midsession today, although that’s still down about $2.50 from last Friday’s closing high of $115.55. Still, we remain cautiously optimistic on this point as well since pork cutout topped $130.00 at the highs of the past two years.
Technical analysis: Bulls still seem to own the short-term technical advantage in August lean hog futures, especially after the late surge carried the contract back above its 10-day moving average (near $96.10) at the close. Bears were likely encouraged by yesterday’s settlement below that level (for the first time since May 30). If the market were to move back below that point in the days ahead, they would be targeting the 20-day moving average near $93.90, the psychological $90.00 level, then the 40-day moving average near $88.39. Look for initial resistance at today’s high of $97.65, with backing from last week’s high of $96.80. A move above that level would open the door to a retest of the $100.00 level, then the July 6 high of $100.75.
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