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Slaughter capacity should increase after plants are forced to reopen, analyst says
News that the Trump administration plans to order U.S. meat processing plants to stay open to protect the country’s food supply helped spark a strong rally in the hog market. While the industry faces about 25% drop in slaughter capacity, traders clearly are looking past the shutdown and toward stronger demand and seasonally declining supply into June and early July. As the closed plants come back online, the market may be set to avoid a major backup of hogs in the country.
Lean hogs closed well off of their highs Tuesday, and July hogs managed to rally to their highest level since March 31. The June contract gapped higher on the opening. With the slow slaughter pace, traders had feared that hogs would back up in the country and that cash markets would collapse. However, cash prices have inched higher over the past week, and pork values have surged.
The CME lean hog index as of April 24 came in at 48.98, up from 47.72 the previous session and up from 44.55 a week before. The USDA estimated hog slaughter came in at just 283,000 head on Tuesday. This brings the total for the week so far to 586,000 head, down from 719,000 last week at this time and 939,000 a year ago. The USDA pork cutout, released after the close Tuesday, came in at $87.35, up from $82.69 on Monday and up from $69.00 the previous week. This was the highest the cutout has been since November 18. This rally has been unprecedented; the cutout has gained $36.19 in nine sessions.
Packer margins are deep in the black, which should help them quickly resolve some of the slaughter issues.
The shutdowns are seeing heavy coverage in the media, and now that the government is forcing plants to reopen (exempting packers from liability), the slaughter capacity should increase. For now, slaughter is falling off sharply, and pork values should remain strong. Once the virus issues are resolved, the market should be in position for a substantial rally, as Chinese demand is strong. Look for good support for July hogs in the 58.22 to 56.47 zone. Consider buying the market in the support zone looking for a spring uptrend, with 66.02 as resistance and 71.27 as the initial upside target. June hog support is seen at 53.42, with resistance at 57.75 and 61.57 and then 64.25.
For more information, contact Terry Roggensack, The Hightower Report: