04-10-2012: June Lean Hogs: Beef Market Developments Open Up Channel for Hogs
It's all about "pink slime" that has been dominating the cattle futures markets. There is a potential beneficial spillover effect for the hog markets, as customers switch from beef to pork. Other developments suggest a seasonal bottoming of hog futures. With grain and feed prices starting to increase once again, there is a counterbalancing force which might discourage meat producing farmers from holding on to their produce a bit longer. But it is the pink slime debate that seems to be the dominant item for speculators. A survey of our own internal traders suggests that no matter how much the producers of pink slime protest it is healthy and harmless, the idea of the stuff which is added to hamburger by a majority of producers does tend to discourage ground meat consumption. Could it could be healthy and nauseating at the same time? ABC News scored big with this release.
Nonetheless, despite this limited good news for hogs, there remains relatively high prices for pork products compared to earlier years. This, coupled with seasonal tendencies which include holiday ham selling over, and the ubiquitous technical indicators, causes us to suspect hog prices will go lower.
We fed lean hogs, live cattle, and feeder cattle into a neural network to get the following result:
June Lean Hogs:
June Lean Hogs:
Some traders believe the hog market has put in a seasonal bottom. Part of this is based upon recent media attention to the makers of "lean finely textured beef, (LFTB)," called "pink slime" by critics. Manufacturer Beef Products, Inc. claims that pink slime, a cheaper filler added to ground beef, makes the product safer because every box of LFTB is inspected and held until cleared for shipping. They claim their product has never led to any deaths or sickness. Four food experts from ABC News disagree. They say, since it is added to ground beef in a 15% ratio, how would that make the rest of ground beef safer? Further, under pressure, the U.S. FDA has concluded it is safe but at the same time endorsed the labeling of beef products as "LFTB free" or "contains LFTB" and will inspect to make sure the food is true to its label. Tyson and Cargill have both backed voluntary labeling. So traders are anticipating pork consumption will pick up relative to beef in the wake of all the media attention to potentially unsafe beef (even if beef is safe.) Actual statistics suggest beef demand has fallen off because of this. The trade has discounted concerns over heavy hog weights. The difference is 277 pounds versus 273 pounds last year. U.S. pork production in the latest week is down -0.11% from a year ago. Hog slaughter for the week is 2.124 million head, up from 2.063 a year ago at this time. Pork cutout prices also rose. Most of these changes are small enough to be statistically meaningless in our opinion, so traders are right to discount. The FDA is placing a ban on use of antibiotics in animals starting April 13th. It is concerned continued use there will decrease effectiveness for use in humans. It will allow the drugs to continue to be used to treat specific animal illnesses, but not as a general preventative measure. Some meat processors have been idle as part of the Easter holidays. That could lead to flat to higher trade volumes in lean hogs. Some of the leading packaged meat producers in the world are companies of which Americans may not be aware. They include American Dairy, Zhongpin of China, Smithfield Foods, and John B. Sanfilippo & Sons. U.S. corn inventories are expected to tighten by as much as 36% by the end of the year by the USDA. This could lead to higher feed costs and earlier marketing. Rising hog feed costs and expenses by some major pork producers to convert barns to phase out cramped cages to confine pregnant sows are causing rising ham prices. Animal rights activists and consumers have pressured Smithfield Foods to spend about $300 million to convert its barns. Sows tend to fight, and switching from confined cages to more open pens requires more labor to manage the sows in open pens which fight. These costs are likely to be passed on to consumers. Wholesale ham has been selling at 75 to 80 cents per pound, well above the 55 cent average for the preceding five years. Producers are doing their best to keep these cost increases from being passed on to customers. Lowes Foods in Winston-Salem, N.C. is selling Gwaltney sprial hams for $1.47/pound. Americans consume about 51 pounds of pork per year on average, according to the USDA. Pork prices typically peak in June, with the lowest at the end of the year when large numbers of hogs reach the market.
119.0I R 4/ 5
I CME - Jun-12 Lean Hogs, 40000 lbs., c/lb. Cm.=0.08 Lim.= 2.4
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Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for lean hogs. Therefore, the above chart is taken as giving a buy signal.
We are headed toward a cyclical low and a seasonal down period.
Our best-performing internal program is "Pattern." It is giving a sell signal.
Results of "Pattern" for Lean Hogs (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has triggered a sell signal. (Note, disregard the year 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 $1,688. Use of options is advised.
Scale trade sellers are entering the market for the long term 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. Blue is small speculators. Red is large speculators. Green 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 December 82 Call @ 4.95 or better.
What the Jun - Dec. 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. The best time to enter or leave the above spread is when it is at +11.00 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +14.00 or wider buying the far as prices are rising and then selling the near.
Here's an intraday chart for the previous day ( 4/05 ).
Risk Versus Opportunity Report
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LHM2 June Lean Hogs
High Price: 96.21
Current Price: 93.53
Low Price: 88.09
Risk: -0.058
Opportunity: -0.118
(O/R) Ratio = 2.030
| Factors | Weighted 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 | - 6 |
Place 8 June Lean Hogs on a Sell Watch with stoploss @ +2.50 above the get-in point._____________________________________________________________________________________________________________________________M.T.
