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Hog Market Rally to End Quickly

USDA’s survey of packers today showed they intend to process 2.443 million head. That was a little lower than our 2.455 million head estimate posted this morning. It would be down from last week’s current record of 2.535. This week’s kill is only 0.5% over last year. The previous four weeks ran 3.8% over. There is a transition lower going on right now in the comparison against last year. We should be running about 2% higher in the coming weeks. This still leaves us expecting a new record next week. Next week is the last full kill week of the year. At 3% over last year, it would be 2.574 million. At 2% over last year, it would be 2.549 million.

Lower weights are helping us out a little. They are in no way the driver for this recent rally, though. For the past six weeks, hog weights have flatlined at 209 pounds for the average carcass. That is 0.9% under last year. With the lower kill this week, pork production fell from 535.9 million last week to 516.3 this week due to the slaughter cutback. With the lower kills plus lower weights, we actually dipped to 0.5% under last year.

For most of this rally, the trade is pointing out that packers are showing a willingness to pay up for next week’s kill. They see a limited period left for their extraordinary profits and are willing to take a smaller margin exchange for record kill numbers. This willingness to accept a lower margin is the new discussion point for the past two to three months. A good chunk of this willingness to change may be related to this cold temperature issue. Mankato, Minnesota, saw a fall down to 7°F. this morning. It will be worse next week, much worse. The daily lows from Monday through Friday next week will range from -1°F. to -5°F.. That is a deterrent against marketings. As next week is the last full kill week, packers have to go after these numbers. That does not means this is all bullish. What happens next week when packers are buying for the last half of December? What happens when temperatures return to normal?

Another rumor in the market is that part of this rally is from China buying due to high pork prices and the need to get product in before a Trump trade disruption of some sort. That is a good rumor, but cannot be denied or confirmed at this time. Thursday’s weekly pork export sales report was good for the period from November 25 to December 1. We have sold 6% more pork this year to all countries. Of that amount, China has certainly bought more — whether or not they have suddenly bought more is the question.

On the charts, this market is still officially a bull market as new highs for the uptrend were just made yesterday. Today’s lower AM trade and rebound back by the close still looks good. We even filled that first gap at lower prices today before coming back (the bullish way to fill a downside gap). There is one more from 57.72 57.80 that may need to filled later on.

While we do not expect this rally to last much more than a few more days, the market has spoken for now. Bulls are in control based mostly on packer changes and to a very minor extent, better end user demand. We’ll stand aside and let the market complete the move it is intending.

Rich Nelson | Allendale Inc. | (815) 578-6161

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