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Hog Report Seen as Bearish for Monday's Market

03/28/2014 @ 4:32pm

We thought our, and the rest of the trade’s prereport expectations were conservative. USDA took that to a whole new level this afternoon. The total hog herd was only 3.3% less than last year as of March 1. That was a much bigger herd than the 5.5% decline that analysts expected (ALDL -5.1%). I’m not saying this afternoon’s report is unrealistic but……..it is very, very unrealistic. 


The Kept for Market herd, those barrows and gilts that will hit the packing plant between March 1 and August 30, was estimated at 3.7% less than last year. The analyst guess here, which we suggest was conservative, was for a 6.0% decline. The category of hogs that are in the kill right now, those weighing over 180 pounds on March 1, was seen at 4.8% less than last year. Get this: USDA is already off with their numbers. The weekly slaughter since the start of March has run 6.7% lower than last year. The next two weight categories are only for a 3% year-over-year decline. The hogs that will be slaughtered from later July through August were 4% lower. Don’t forget, there are widespread industry expectations that summer slaughter will run 10% to 15% lower than last year!


Breeding Herd: The breeding herd was estimated to be 0.3% higher than last year. That is a change from the December 1 numbers of a 1.1% decline. Based on facts we know, that sow slaughter from December–February was 4% lower than last year. We can compute that new gilt additions, young females, ran 5.1% over last year. In other words, producers are expanding. We cannot argue with this at all. The tremendous profit incentive here is just too much to ignore. In the past Dec–Feb quarter sows farrowed, giving birth, to 2.8% more litters. Their pigs per litter count was 5.5% less than last year. This is the first year-over-year drop in pigs/litter since Jun/Aug of 2003! This is where they identified PED. It is another way of making May–Aug slaughter estimates (other than the Market Hogs weight breakdown noted above). For the next two quarters producers told USDA they intended farrowings 2.4% higher and 2.0% higher respectively.


Market Impact: If you believe these numbers, which we don’t, then hog slaughter will run 3% to 4% lower than last year through August. Adding in higher weights and actual pork production would be set to be only 0.5% to1.5% less than last year. Futures are trading 25% over last year's levels. If you believe this report, then a $10 to $15 correction is easily due. The floor right now is in a panic and is already talking of a limit down $3.00 lower open on Monday. If these numbers were true then expect next week to be a train wreck for pricing. Don’t forget that we have a lot of new money, East Coast, on the long side of this market. We can make a tremendous fact-based argument about why futures should open lower Monday, completely forget this report by Tuesday, and be posting new highs by the end of the week. On the other hand, based on the psychology of these new traders and the idea that markets look to USDA as the final source of information, you can suggest Monday through Wednesday will spill a lot of blood. As it stands right now, we cannot suggest USDA’s report is accurate. It is very common for these quarterly reports to underestimate both expansion as well as contraction in supplies. For trading, we have no real positions on. Our bias is to buy whatever decline is ahead. We will WAIT until technical signals suggest the market is ready for that…Rich Nelson


Working Trades:

  • (1/3) Sold 2 Jun 96.00 puts 1.95, risk to 1.97, objective 0. Closed 0.07.
  • (1/24) Sold 1 Jun 98.00 put 2.02, risk to 2.10, objective 0. Closed 0.07.

The bean market finished the week’s trade on a rather quiet note as most of the trade seems happy being on the sidelines for Monday’s report. News today was limited, so there was nothing out there to really push the market one way or the other. The bean basis continues to be pressured today in SA but is starting to strengthen is the Eastern Corn Belt of the U,S. Late in the day there was talk that Brazil would be putting an export tax on beans. It is far from a done deal, but if it were to be enacted, it would take make Brazilian beans more expensive if the sellers would try to pass the cost onto the buyer. Next on deck for the trade is Monday’s report. For the report, Allendale is looking for bean plantings to come in at 83.212 million acres. This would be a new record for bean plantings if achieved. Allendale is looking for the quarterly bean stocks to come in at 981 million bushels. This would imply a 1.167 billion-bushel second quarter usage. That would be largest usage ever for that quarter. A Reuters industry survey showed that the average trade guess for beans acres is 81.075 million acres. Last year the U.S. planted 76.533 million acres. The high end of the guesses was 83.60 million acres with the low end at 78.500. As for grain stocks, the March 1 average trade guess is 989 million bushels. Last year the March 1 stocks came in at 998 million bushels. The high end of the trades guess is 1.087 million bushels while the low end of the guess is 955 million bushels.  As for Monday’s trade, be ready for some big-time volatility. For July soybeans, there has been a bearish reaction to Monday’s report in 10 of the past 15 years with an average decline of 22.9 cents. Of the five up years, the average increase was 29.7 cents. In the past four years the reaction was -30.75, +38.25, +47, and -45.5. The report will be released Monday at 11:00 central time.….Jim McCormick 


Trade Recommendation:

  •  (11/5) Bought a November $11.40 put, sell a November $10.00 put, sell a November $12.20 call for  4 cents.  settled at  -21 cents

 

 

 

 

 

Rich Nelson 
Allendale Inc. 
815-578-6161

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