03-10-2008: April Lean Hogs: Producers Not Restraining Production
If there is any group of farming interests that is not cooperating with itself in any sort of disciplines, restrained production, it is hog farmers. For years they have been being priced out of the market by much competition and low prices. There were some hopes that this might change due to high grain prices increasing the cost of production well beyond the profitability stage. But at the first sign of falling grain prices, the hog farmers are back at it again.
The attitude toward hogs as farm animals is extremely poor throughout the world. They are not perceived as the clean, intelligent animals they are, but rather kept in filthy crowded and inhumane conditions while wild hogs are shot for sport by anything but sportsmen (more like spoiled rottern kids) with carcasses left to rot.
America's lack of concern for animal rights has long bothered us and we cheer when hog prices fall, discouraging further production. It appears hopefully that is what is happening now.
April Lean Hogs:
April Lean Hogs:
The last Hogs and Pigs Report showed a hog herd up 4.5% from last year. Funds went short in a big way on hogs. They are counting on a collapse in commodity prices. Cumulative slaughter is running 10.1% over last year. Slaughter last week dropped to 4.9% over last year. China imports from the U.S. ranged from 11.7 million pounds to 18.8 million pounds of pork products for the first 9 months of 2007, but hit 42 million pounds in November. Based upon this, China could have a significant impact on U.S. hogs prices. Sharply lower grain prices are encouraging farmers to hold off bringing hogs to market. The 2-day lean hog index has beend dropping over the past few days, $60.05 to $59.90 to $59.46. Trend following funds increased their short position. Increasing exports ahead are a strong possibiity, but a stiff correction may ensue first. In early 2007, there was hope that hog producers would restrain production. High corn prices and uses for ethanol and not for feed contributed to optimism. But hog producers did not cut back production. Instead they raised it by an anticipated 5% over last year. The pig crop as a whole is up 4.2% from a year ago.
116.0I T 3/ 7
I CME - Apr-08 Lean Hogs, 40000 lbs., c/lb. Cm.=0.08 Lim.= 4.0
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The above point-and-figure chart is giving a conventional sell signal.
We are headed toward a cyclical high and a seasonal down period.
Our best-performing internal program is "DCV" (Daily Cumulative Volume). It is giving a sell signal.
Results of "DCV" for Lean Hogs (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $400. Initial margin on a single contract is $810. Use of options is not advised.
Scale trade sellers are entering the market in this price range.
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. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that a major change in direction to up is imminent at a volatility low point.
Our option trade recommendation is to sell the Lean Hogs June 74 Call @ 4.05 or better.
Here's an intraday chart for the previous day ( 3/07 ).
Level Table:
| Factors | Weighted Points |
|---|---|
| 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 |
| Commitment of Traders | - 1 |
| Historic Range | - 1 |
| Range/Volatility | + 1 |
| Level Table | + 1 |
| Other Factors | - 1 |
| Total | - 3 |
Place 18 April Lean Hogs on a Sell Watch with stoploss @ +3.20 above the get-in point.________________________________________________________________________________________________________M.T.
