The hog market fits some of the criteria listed in the introduction for this letter, but buying deferred options is very difficult and the June futures have already priced in a 17% increase in price from February to June. Therefore, we will consider another type of strategy for the hog market into 2010. February hogs have some room to run higher, and we may look to enter on a corrective break. On the other hand, cattle is a market which should do much better in 2010, with the August contract worth considering as a position trade as long as traders are patient and enter the multiple bull spreads on a break into the end of this year.
Pork production from the 4th quarter of 2009 to the 1st quarter of 2010 is expected to show its steepest drop in six years. In addition, the decline in pork production from the 1st quarter to the 2nd quarter is expected to be close to the second largest in history (2008 was the largest). This situation is likely to be a positive force for June 2010 hogs. The larger than normal “shifts” in production into the first half of the year indicate that stronger than normal seasonal strength should be seen just ahead. The market continues to climb a wall of worry. It remains in an uptrend off of the early August lows despite continued talk of a seasonal setback in ham prices into the holiday season. Pork cutout values have surged to their highest level since October 7, 2008. The jump in product prices is supporting high packer margins and helping to improve the cash market outlook. With the higher margins, packers are interested in moving as many hogs through the pipeline as possible. This is a factor which should help keep producers current with marketings and help keep average weights and production down into the holiday period. Traders remain concerned with the potential for a 2-3 week seasonal period of weakness just ahead, but with production expected to shift to a lower level into the first quarter, the break may be shallow.
In general, cattle demand has been very poor into late this year, as a shift towards lower-priced poultry and pork by consumers has pressured beef prices. In addition, restaurant demand is down, as corporate holiday parties are being cut back sharply and consumers are trimming budgets. These factors continue to keep demand slow, and this is causing cattle marketings to slow and cattle to sit in feedlots for a little longer than expected. The decline in production into the 1st quarter is a little less than normal, which could mean that the seasonal support to prices will not be as strong as normal. The jump in production into the 2nd quarter is higher than normal. However, the USDA currently shows a decline in production from the 2nd to the 3rd quarter for the first time since 1996, so longer-term position traders might concentrate their buying efforts on the August 2010 cattle contract.
