09-05-2017: December Lean Hogs: Over Reaction to Herd Size and Slaughter Facilities Increasing

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calend Spread

Level Table
Other Factors
Recommendation

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Introduction

Almost always our ultimate recommendation agrees with "Other Factors" in our Decision Matrix because that often measures a strong trend in one direction which is usually described as "your friend." This time we have an exception, and one doesn't have to look far to find out why. Lean Hogs futures are very reactive, meaning also that they are "forgiving" if one makes a mistake and often offers chances to "get out." Thus, after a strong downward trend, one is apt to find a reaction. But more importantly, analysts all seem aware that there is a tremendous discount of the futures price to the cash markets. The discrepancy is so large as to give rise to claims of "oversold" and "over-reacted" markets. In the short-term, at least, that almost always signals a potential "bounce." Weakness in the futures appears to have been in reaction to the previous "Hogs and Pigs Report" which after all was said and done, may have disappointed bulls a bit, but didn't seem all that different from what one would normally expect in a stable market. Cries of extreme volatility seem based upon an inability of hog farmers toi react to changing prices due to the short life span of piglets and the frequency of breeding them. Current futures prices definitely signal an "over-reaction," at least in the short term.


Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:




Parabolic Chart

December Lean Hogs:

Parabolic Chart


Nirvana Chart

December Lean Hogs:

Initial Chart


News Analysis

USDA pork cutout values have been dropping steadily week to week and in the last few days. They are the lowest since May 15th. October hog futures are at a discount to the cash value to 13.25. The five-year average is at 3.87 so the market is pricing in a cash market break which is $10 more than normal. The market has found some support from solid export sales. Weekly export sales were at 25,900 tonnes, compared with a four-week average of 18,800 tonnes. Cumulative sales for 2017 have reached 856,8009 tonnes, up 7.6% from the previous year at this time. Total slaughter for the week came to 1.796 million head, up from 1.771 million last week and up 3.3% from a y ear ago. Actual U.S. pork production was at 484.6 millioin pounds, up from 473.2 the previous week and up 4.3% from a y ear ago.

Next week a new slaughter plant with a capacity of 10,500 head per day expandable to 21,000 head per day next year in Sioux City. It is one of two new plants to be opened next week.

Overall, the picture suggests that the market is oversold, and the discount of futures to cash is too wide. Looked at quarter by quarter, one of the largest production declines on record is shaping up to be 465 million pounds from the previous quarter, compared to a decline of 239 million last year. These seasonal considerations should assume a large part in planning trades.

USDA's weekly slaughter estimate was at 2.315 million head, a slight dip from last week's 2.344 which is normal for this time of year. A Labor Day weekend may present a surge of supply, which could remain long after Labor Day.

Weights were running 0.5% to 1.0% below last year until the most recent report where they are equal. National Pork Month in October is a big deal for pork producers. August pork export numbers out of Brazil were at 58,899 metric tons compared to 48,713 in July. It was 2.3% larger than the previous year. Poultry Brazilian exports were up 16% over last year.

Over the years, the prok industry in the U.S. and Canada has become tightly integrated, with many Canadian hog farms focusing on breeding pigs and then sending feeders to the U.S. for finishing operations. Lower feeding costs and economies of size have contributed to this division of labor. The herd size in Canada is growing by at least 1.2% this year and every year. U.S. herds are growing even faster with a combined increase of 1.4% for the two countries. Head counts may conceal the number of pigs saved per litter which is 2.9% higher than last year in Canada. Statistics differentiate between the "pig crop" and number of pigs, with pig crop defined as number of pigs thkat either were on hand for sale or were sold during a six month period.

Falling grain prices favor withholding bringing meats to market.

A large number of analysts point to a "trend reversal" on hog futures charts as under-valuing hogs despite rising supplies.

Live pigs are usually six months old when ready for slaughter. Unlike the live cattle market, farmers are barely able to react to price fluctuations since the slaughter of pigs ready for slaughter can neither be sped up nor slowed down. A slow can give birth to piglets twice a year. The largest consumer of pork is China, followed by the EU and then the USA. The EU is the largest exporter of pork while Japan imports the most.

Latest China porkk prices were around $2.15 (USD) per kilogram. This is a real decrease from a year ago where theyh were at $3.00 (USD). But it is still more than the average price over the last five years for China.

A recent buying spree in hog futures up until July was due to optimism which occasionally surrounds the dreaded "Hogs and Pigs Report," which has a significant impact on hog prices. Traders threw caution to the wind and were disappointed with some of the "neutral" aspects of the last report when it came out on June 29th. It comes out quarterly..

The U.S. hog herd is estimated to grow by 3% this year, but the breeding herd is only expected to grow by 1-1.5%. This is a signal of mild expansion, but not "aggressive expansion." A surge in U.S. hog exports is due to reasonable hog prices, with pork production increasing 3.4% in the second quarter but demand increasing by 4%. Analysts say do not place too much emphasis on those numbers because demand for pork can turn soft on a dime. It is therefore a "wild card". The European Union and Canada are selling pork cheaper than the U.S. and the pork production capabilities of China are expanding. Additional hogs there are starting to drive prices downward.


Point & Figure Chart

 67.0I                                                                  R  9/ 1
     I CME - Dec-17 Lean Hogs, 40000 lbs., c/lb.   Cm.=0.08  Lim.= 2.8
     I
     I
     I
 64.5I___________X_____________________________________________X_______________
     I           XO                                            XO
     I           XO                                        X   XO
     I           XO                                        XO  XO
     I           XO                                        XO  XO
 62.0I___________XO________________________________________XOX_XO______________
     I     X     XO                            X X     X X XOXOXO
     I X X XO    XO                            XOXO    XOXOXOXOXO
     I XOXOXOX X XO                            XOXO  X XOXOXOXOXO
     IOXOXOXOXOXOXO                            XOXO  XOXOXOXO OXO
 59.5IOXOXO_OXOXOXO____________________________XO_O__XOXOXOX__OXO______________
     IOXOX  OXO OXO                            X  OX XOXOXO   O O
     IO O   OX  OXO                            X  OXOXOXO       OX
     I      OX  O O                            X  OXOXOX        OX
     I      OX    O                            X  OXO OX        OX
 57.0I______OX____O____________________________X__O___OX________OX_____________
     I      O     O                          X X      OX        OX
     I            O                      X   XOX      OX        O
     I            O                      XOX XOX      OX
     I            O                      XOXOXOX      OX
 54.5I____________O______________________XOXOXOX______OX_______________________
     I            O                      XO OXOX      OX
     I            O                      X  O O       OX
     I            O                      X            OX
     I            O                    X X            OX
 52.0I____________O____________________XOX____________OX_______________________
     I            O        X           XOX            O
     I            O    X   XO          XO
     I            O    XOX XO          X
     I            O    XOXOXOX         X
 49.5I____________O__X_XOXOXOXO________X_______________________________________
     I            O  XOXOXOXOXO        X
     I            OX XOXO OXOXO        X
     I            OXOXOX  O O O        X
     I            OXOXO       O        X
 47.0I____________O_O_________O________X_______________________________________
     I                        O        X
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 44.5I________________________O________X_______________________________________
     I                        O        X
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 42.0I________________________O____XOXOX_______________________________________
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     I                        OXOX X
 39.5I________________________O_OXOX___________________________________________
     I                          OXOX
     I                          OXOX
     I                          OXOX
     I                          O O
 37.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
                               111111111111111
      222233345556688888888899900000111122222211222233346666777888
      011200120110201111112200000012001100222201111201121122012013
      829339609292280115694628944644484699023830356733752939694461
Our computer tells us a non-conventional reactive approach works best for Lean Hogs on p&f charts. Therefore the above chart is taken as giving a buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "%R". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "%R" for Lean Hogs (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $400. Initial margin on a single contract is $1,453. Use of options is not advised.


Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that the current uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Lean Hogs April 64 Put and Sell (1) Lean Hogs December 56 Put @ 0.325 to the buy side or less.


o 1 o 2 o 3 0 4 o 5


Calendar Spread

What the Dec. - Jun. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. This disagrees with our ultimate conclusion. The best time to enter or leave the above spread is when it is at -13.50 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -18.50 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the sell the far, buy tne near point..





Level Table:

Level Table

The path of least resistance is down.
 71.0|                                                                  R  9/ 1
 CME - Dec-17 Lean Hogs, 40000 lbs., c/lb.   Cm.=0.08  Lim.= 2.8
     |
     |
     |
 66.0|_________________________________________________________________________
     |
     |YY
     |VYYY
     |VVWWWWWYYYYYZ
 61.0|LLMTTTUVVVWWWWWWXXXXXYZ__________________________________________________
     |LLMMMMMMOTTTTTTUUUUUUUUVVWWWWXXXXYZ
     |LMMMMOOOSSSSTUUUVVVWXXYZZ
     |LLLMNNNNNOOOOOOOSSSSSUUVVXZZZZ[
     |KLLMMNNNNNNNOORRRSSZ[[   <<<
 56.0|JKKLMMPRZZ_______________________________________________________________
     |HHHJJJJJJKKKKKKKKPPPPPQRRRZZ
     |HHHHHHHJJJJJJJKPPPPPQQQQR
     |HHHHJJQRR
     |GGHHHQQR
 51.0|GGHQQQ___________________________________________________________________
     |GG
     |AAAG
     |AAAAG
     |AAG
 46.0|AGGG_____________________________________________________________________
     |ABFFGGG
     |AAABBBFFF
     |BBBEF
     |BEEEEEEEEFFFF
 41.0|BBBBDEEEEEFF_____________________________________________________________
     |BCDE
     |BCCCCCCDDD
     |CCCCCCCD
     |CCDDDDD
 36.0|_________________________________________________________________________
     |
     |
     |
     |
 31.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.629
           1 1 1 1 1 1 1                                              
       9 9 0 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 8           9
       0 1 0 1 3 1 2 1 2 1 2 1 2 1 2 1 2 0 2 0 2 0 2 0 1 3           0
       6 9 3 7 1 4 9 3 8 2 7 0 7 3 7 0 5 9 3 7 1 6 0 3 7 1           1


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 9/01 ).

Intraday Chart



                 Risk Versus Opportunity Report
                ________________________________

                  HEZ7    December Lean Hogs

                      High Price:  63.28
                   Current Price:  58.05
                       Low Price:  55.49

                            Risk:  0.086
                     Opportunity:  0.176

                    (O/R) Ratio =  2.049


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart + 1
News - 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System + 1
Historic Range + 1
Commitment of Traders - 1
Range/Volatility + 1
Level Table - 1
Other Factors - 1
Total + 2
Place 10 December Lean Hogs on a Buy Watch with stoploss @ -4.38 below the get-in point when recent price is represented as "57.70".
____________________________________________________________________________________________________________________________________________M.T.