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Analyst: Time to Take Hedging Action in Hog Market

The USDA's Estimated Slaughter report on Friday presented smaller numbers than we expected. Though the 80,000 head kill for Saturday was within trade expectations, the 419,000 for Friday was a surprise. The normal one-plant closure on Friday would bring a 430,000 head run. This week's 2.249 million head kill would be the smallest since April 15, when we had Good Friday and weather issues. It is normal for slaughter to decline until it hits the year's lowest point in the summer in late June/early July. Compared with last year, it was 4.4% larger. Our estimate from the AM Livestock Essentials page would have been 5.0% over. Lower supplies are impacting the market and giving us the rally that was expected. For those asking why hog prices don't continue rallying seasonally until the supply low hits, the answer is demand. Hogs bought in late June/early July fill the July hot weather market. That is normally a different, lower demand than May and early June.

Lean hog futures pushed to a new high for the uptrend as well as a new high for the contract. This was unexpected as cash hogs have now struggled for two days in a row. We would not at all call this a top for cash hogs, simply a stumble. Futures already have Friday's cash hog price factored in, as well as another two weeks of higher futures. Don't forget, June futures are trying to figure out cash hog trading as of June 14 (technically the 13 and 14 via the lean hog index). We are trying to guess how high futures will be at specific points in time.

This week was important as Congress has been notified that the NAFTA process has started. We are not expecting roadblocks to U.S. agriculture exports. Almost no one in the industry is. We are wary of potential roadblocks, though. Pork has seen a benefit from NAFTA that rivals that seen in corn.

With a 430,000 head run for tomorrow and about 82,000 for Saturday, this week's kill could be on track for 2.262 million. That would be 5.0% over last year. In the previous four weeks, the kill was 4.3% over last year.

The monthly Cold Storage report will be out on Monday. We expect 581.173 million pounds of pork at the end of April. That would be 26.1 million over the end of March. April is normally a stocks build month with about 32.6 million being added to storage over the past five years.

We are moving out of our bullish viewpoint for this market into something a little more neutral. Between now and the end of the month, we'll take action on the hedging side. Anywhere in the +$77 range via summer futures is a valid price to work from. Our focus is the October and December contracts. Additionally, feed cost hedges are needed before a summer weather rally.
 
Rich Nelson | Allendale Inc. | 815-578-6161

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