Analyst: The U.S. Hog Industry is OK
At yesterday's summer AgLeaders Conference session, we reiterated our long-term view on the hog and pork markets. As an industry, we are doing OK right now. For the year, our model is penciling out an $18 per had profit for producers assuming hog and feed prices get locked in today. That includes strong profits of just over $40 per head from June through August on down to a $0.06 loss for December marketed hogs. For 2018, a $12 per head profit can be locked in. Current breakevens are $61. That would rise to $64 factoring in the premiums in the back months.
One key point we made, which has to be discussed again, is that these futures prices made for the projections are artificially inflated. Since we are at the low supply time of year, these back month hog contracts are trading at likely their highest points you may see.
The USDA sees this week's kill at 2.239 million head. That was a little higher than we were expecting. As our charts show, we are now on the upward portion of the annual supply cycle. This week's kill would be the largest in 10 weeks. You will likely see some pressure start to show in those cash bids now. On the positive end, this week's kill was 2.1% over last year. That is a bit under the 4% higher that was implied by the June Hogs and Pigs report. It was also higher than the past four weeks that ran 3.4% over last year. We are not ready to revise down our Q3 or Q4 supply estimates based on this but it is positive news.
In the short term, we are wondering if the August contract is just too low. It expires and is cash settled to the Lean Hog Index on August 14. We are not buying it, but will monitor the situation closely.
On the speculative trade side, though we are bearish for December, the October may be only slightly overpriced. With a 7.45 swing of profitability from the chosen $67 strike price, we are simply collecting premium.
We are satisfied with the hedges on hogs out through February that use the December contract. As of the open of June 5, at the equivalent futures price of 63.07 using December hog options, these hedges should be in place. As of the July 3 open, we also have feed cost hedges using December corn options.
Rich Nelson | Allendale Inc. | 815-578-6161
This material has been prepared by a sales or trading employee or agent of Allendale Inc. and is, or is in the nature of, a solicitation. This material is not a research report prepared by Allendale’s Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.
DISTRIBUTION IN SOME JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW. PERSONS IN POSSESSION OF THIS COMMUNICATION INDIRECTLY SHOULD INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH PROHIBITION OR RESTRICTIONS. TO THE EXTENT THAT YOU HAVE RECEIVED THIS COMMUNICATION INDIRECTLY AND SOLICITATIONS ARE PROHIBITED IN YOUR JURISDICTION WITHOUT REGISTRATION, THE MARKET COMMENTARY IN THIS COMMUNICATION SHOULD NOT BE CONSIDERED A SOLICITATION.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Allendale Inc. believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.