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Hog Cycles

In the hog market there are two cycles that make life exciting for hog producers, hog processors and hog traders/speculators. The are:

1. The Seasonality Cycle: Because of the biology of hog reproduction, the number of piglets born in December, January and February is lower and the number born in May, June and July is greater. This creates seasonal low kill rates during the summer with corresponding higher prices and higher kill rates in the winter and lower hog prices.

2. The Hog Cycle: When producing hogs is highly profitable, producers tend to expand production and expansion tends to continue until there is over-expansion and excess production. This over-expansion results in losses for producers which leads to liquidation until profitability returns. These peaks to valleys tend to run four to seven years. They were first observed by Samuel Brenner who in 1876 wrote ". . . advances and declines in value as alternately certain as the diurnal revolutions of the earth upon its axis." I think he was trying to say that just as sure as the sun comes up in the morning, the price of hogs will go up and down.

We all know where we are in the Seasonality Cycle - we are just coming to the end of the low summer kill rate and there is much wonderment about how low prices will go during the late fall/winter kill period. "The Market" has priced in a drop of 32.37 by the time we get to the middle of December. That is a 41.35% drop in value!

The scary part is that a full blown trade war could cause the index to drop another ten to fifteen points if a full blown trade war were to erupt and exports were to plummet a lot further. On the other hand, progress in tariff and trade negotiations could open up the export channels and an immediate rally could begin that would add ten to twenty points to the ZZZs. Last year the ZZZs went to cash settlement at 64.11. One year ago on this date the CME Lean Hog Index was at 91.26 compared to the component of Thursday's kill being at 78.30.

Regardless of what has happened to the ZZZs or what will happen to them, there is a good chance that the MMMs have been beaten down too low in sympathy with the ZZZs and they will rally ten points or so by the time we go to cash settlement in early June. So I climbed onto a long MMM pig Friday.

If there is a lot more down-side coming to the ZZZs, the MMMs could tumble another ten to fifteen points. So I have kept some powder dry and will buy again at 60 and 50.

And what about the Hog Cycle?

My data shows the CME Lean Hog Index cresting at 134.17 on 7/16/14 following the P.E.D. episode. I think, based upon the price of the ZZZs, we are now in the "Chase" looking for the "Trough" to this cycle. On 4/11/18 we did post a low of 52.97 but the "The Market" says we will take that out by eight to ten points in December. When these "Troughs" hit, it takes out the under-capitalized, un-hedged producers. Our good friend Stoney said he went out in the '98/99' washout.

I took a bravery pill and sold a QQQ Friday to go with the long MMM.

Best wishes,

dhm

Messages In This Thread

Hog Cycles
Thanks for the post Doc. *NM*
You are welcome, Spike. Of the many production
Re: DH, you are so correct------
Re: You are welcome, Spike. Of the many product
Re: Tim, I understand------
Re: Tim, I understand------
As the hog market has moved toward - - -