MURICO.com Forum

The afternoon packers' Purchase Index for - - -

8/29/19 was down -1.04 and the model projects the component on yesterday's kill will drop between -0.85 and -1.15. The VVVs settled discount to the component by -5.33. Primal cuts dropped another -0.46. The model calculates that packers' gross margins on Index hogs is now $2.77 per hog. That does not give the packers very much money to cover payroll, taxes, utilities, depreciation, insurance and a host of other expenses involved in operating a packing plant. This tells me that the drop we say in the Purchase Index on Thursday will likely continue for a few more days.

With their lower bids, packers purchased 90.9% of the moving average daily purchases of total hogs by the time the afternoon reports were released and 95.5% on the Index hogs. With a holiday coming up, chances are fairly good that packers appetites for hogs will have been modest yesterday afternoon due to the up-coming holiday so I am not expecting the final Purchase Index for Thursday to show any strength when the USDA releases the final purchase reports in the morning.

Here are some of the things we know about the hog market:

- Due to the biology of hog reproduction, every year we get a seasonality high and a seasonality low.

- On average over the past eight years the seasonality high in the CME Lean Hog Index has been posted on July 3rd and the low has been posted on December 12th.

- This year the seasonality high was posted on 8/2/19 at 84.66 and we are now in the chase looking for the seasonality low. Last year the low came very early on 9/3/18 at 45.30.

- "The Market" currently has priced in the seasonality low at 65.65 when the December futures go to cash settlement.

- In addition to the seasonality cycle, there is the Hog Cycle that runs four to seven from its "Crest" to its "Trough". The last "Crest" was touched on 7/16/14 at 134.17.

- At this point in time it appears that the "Trough" for this Hog Cycle was hit on 9/3/18 when the CME Lean Hog Index dipped to 45.30. Since we are now in the chase looking for this year's seasonality low, it is possible that a lower "Trough" will be posted if the trade war turns really ugly.

- The six-day moving average carcass weight yesterday was +1.11# heavier than one-year ago.

- From 6/1/19 through 8/24/19 the kill has been 28,458K hogs. Last year during the same time interval it was 27,048K for an increase of 5.22% year/year. This is consistent with the last H&P report suggesting the report was very good!

- More heavier hogs means more pork for the packers to have to sell.

- China and many other countries have lost significant numbers of hogs to the African Swine Fever virus.

- Current hog prices will be determined by supply/demand factors here and now and not by historical measures.

I continue to believe the supply/demand data available in the hog market if far superior to that available in any other market. Even though we are in a trade war that is disrupting the free flow of pork to China, there is a fairly high probability the supply of pork on a worldwide basis is going to become tight over the next year and the chase for the next "Crest" to the Hog Cycle could take the CME Lean Hog Index back to the 90 to 95 level by the time the QQQ20s go to cash settlement so I am long a few of the August futures.

Best wishes,

Doc