MURICO.com Forum

The CME Lean Hog Index component on the kill for -

12/6/19 finally came out and it was down -0.62 to 57.89. This is the first time I have ever seen the packers hold the 201 report up over-night, especially after a weekend. The ZZZs are now trading premium to the component by +2.33. The model calculates that it will take an average daily gain of +0.51 to close the "Gap". That surely does not seem to be the direction that hogs are headed.

However -

The final Purchase Index this morning was up +0.26 and the model projects the component on today's kill will be up +0.05 to 0.25. The component on yesterday's kill is still a big question mark but the model projected it would be up between +0.05 and +0.25 also so an uptrend may have begun. The kill this week is starting out more in line with the projections from the last H&P Report after the monster kill last week. So there is the possibility that the supply of hogs will tighten-up mildly as packers make their final push to get the hogs they need for the holiday demand surge. I am now back long a couple of ZZZs but not very confident of the position.

The six-day moving average carcass weight moved up to 216.73#. That is +2.34# yr/yr. Index hogs were also a bit heavier at 214.89#. Packer hogs are +1.48# heavier than the non-packer hogs. The fact that packers has retained their hogs to heavier weights and reduced the percentage of their owned hogs being killed causes me to think the price of hogs is headed up; thus the long ZZZs.

The model calculates that packers' gross margins are $52.08 per index hog even though cutouts lost -0.10 yesterday.

With hog slaughter numbers being high and carcass weights near record levels, packers are producing huge amounts of pork and they seem to be getting rid of it. This suggests to me that the export trade is quite brisk in spite of the trade war. I think we can be fairly confident that the kill rate is going to decline as we move toward the seasonality high. It almost always does. I see nothing in the data to suggest that demand is going to slacken. In fact the more likely scenario is that demand will strengthen especially if there is some resolution to the trade war. If it turns out that the CME Lean Hog Index is now starting an up-trend as I am suspecting, that will lock in the 54.67 posted on 9/24/19 as the seasonality low putting us in the chase for the next seasonality high. I anticipate that it will be a long, volatile search ending a little after the NNNs go to cash settlement. The market is currently projecting it will be at aboout the 86.50 level. My target is the 95 to 100 level.

The calendar spreads have treated me well the last week or so. Today I made a couple of trips to the bank with profits on long Q/V spreads and piled a few more long J/Ks onto my oat.

Best wishes.

Doc