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Hog Prices Have Started A Turn For the Better

Cash and futures markets take a cue from processing numbers.

This week can be marked as a clear change for the market. Bulls will point out that cash hogs stopped nine straight weeks of declines. Futures did well with June finishing up 4.50 for the week.

For things that changed, we could point out that weekly kills have moved moderately lower.

USDA counted 2.385 million head for this week’s hog kill. That was right next to our 2.387 morning estimate. The two previous weeks were lower than this, due to the holiday issues.

The biggest point to make about this number is that is clearly under the 2.410 - 2.419 levels seen in March. That small bump up in supply that happens in March is over. The seasonal trend from here on out is lower, until the year's smallest kill is made this summer.

For 2018 production estimates, we have changed on numbers only slightly. At 26.581 billion lbs., we see a 3.9% year-over-year increase in pork production. It should be of no surprise that this is a record production. Ten years ago we were at 23.347. Twenty years ago our output was 18.980. USDA is currently at 26.805 for their 2018 estimate, 4.8% over last year. The big sticking point between the numbers is our 7.039 billion lb. estimate for Q4, 3.6% higher than last year. USDA currently holds to a 7.185 billion estimate for that period, 5.7% over last year.

April futures expired today at noon. The 53.82 settlement price will be cash settled to the Lean Hog Index. The LHI is a two day measure of nationwide cash hog prices. For those unfamiliar with the process, the Lean Hog Index quote that you see on your newswire from the CME, at 52.97, is a composite of Tuesday and Wednesday's hog trade. You have to add on top of that the higher pricing for Thursday/Friday.

Today's cash hog trade, the number the finalizes the LHI for April settlement, will be figured up on Monday from the USDA summary report. The CME will then post that on Tuesday. So yes, the LHI quote you see from various sources is from cash hogs two days ago.

As discussed last night, we fully agree that the "buy summer hog futures" argument seems tough to make with this wide spread between the expired April and July hogs. At today's settlement, that spread is a large $25.75. Our argument here is that this spring's hog market was incorrectly priced on unfounded fears rather than supply or actual demand changes.

A large number of outside market investors, unaware of the actual amount of pork we send to China, have had an influence. On the positive side, just like last year's NAFTA scare, the market realized its mistake.

Since we mentioned that this exact same thing happened last year, skeptics will question how come charts does not show a similar oddly large April to July spread. The reason is that last year they hit the summer futures contracts almost as much as the April. This year, with many such as ourselves warning that this was only a short term situation, no one believes we will be having the same discussion come summer. Being bullish summer hog futures is not predicated on any NAFTA resolution or a return to normal tariffs with China. It is simply predicated on the expectation that the market will eventually get back to facts rather than fear.

As noted previously, to justify this market's sharply lower spring hog prices you would have had to see not just a 1/3 to 1/2 cut in US pork to China (the reasonable assertion) or even a complete stoppage of our exports to China. To justify current prices you would have to start pushing quantities of pork from China to the US!

The charts show two gaps waiting at higher prices still, 79.75 and 81.80 on the June. We fully expect those gaps to be filled. The $84 mark is our call for summer futures. Bears are certainly correct with any warnings they have about cold weather and grilling demand. That does not stop our bullish expectation but it does limit some potential upside if it continues.

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Rich Nelson
Allendale Inc. 
815-578-6161

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