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USDA Expected to Raise Hog Supply Estimate

We discussed the idea of a big kill this week, at 2.519 million head, in the morning comments. USDA’s own estimate, released after the close, totaled 2.532 million. Much bigger numbers were posted for both today and Saturday. This is a brand-new all-time record kill. The previous peak of 2.524 was posted two weeks ago. This week’s kill ran 7.2% over last year. Over the past seven weeks, slaughter has run 6.3% over last year and pork production 5.6% over last year.

USDA will be forced to admit some unpleasant truths when they sit down and discuss the pork situation. It has been a little surprising to see them keep their Q4 pork production estimate unchanged at their guess of a 2.6% year-over-year increase. That is a nice and neat estimate made from the September 23 Hogs and Pigs report. Almost half of the quarter is over. With five weeks complete, the quarter’s supply is 4.7% over last year so far. Expect a supply revision on Wednesday. This also leads to the next point: On a seasonal basis, we are still weeks ahead of the normal peak kill week. Our current price expectation is for a sideways trend for the December through $43 to $48.

On the speculative trade, we exited the short $40 put this week. We are not too concerned about prices falling under $40, simply about the possibility of lower prices and the remaining value falling only slightly. Our next trade may be selling a straddle or strangle. This option position would be a bet on a sideways trade.

Rich Nelson / Allendale Inc. / 815-578-6161

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