The Hightower Report

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The market will need to see a steady flow of bearish cash market news to expect further weakness in futures over the near-term. The CME Lean Hog Index as of June 30th came in at 102.24, down 37 cents from the previous session but up from 100.98 the week before. The leaves August hogs near a 900 point discount to the cash market. As a result, the market may see periods of positive futures action on days when the cash market shows some strength. After falling to the lowest level since early June on Friday, the August hogs saw the highest close since June 24th yesterday as the market has rejected moving to another lower price level; at least until the cash market plays some catch-up. August hogs pushed slightly higher on the day early and saw some late strength to close strong yesterday with help seen from record high feeder cattle prices and higher trade for cattle. Strength in other commodity markets plus ideas that the futures are holding a stiff discount to the cash market helped to support. Cash hogs were steady to $1.00 lower yesterday and a called steady for today. While packers need less hogs this week for the holiday-shortened schedule, traders see an increased need for next week. Packer margins are also weak and this helped limit the support early today. The estimated hog slaughter came in at 416,000 head yesterday. This brings the total for the week so far to 418,000 head, down from 789,000 last week at this time but unchanged from a year ago. Pork cutout values, released after the close yesterday, came in at $96.20, down 33 cents from Friday and down from $100.74 the previous week. It will take steady erosion in cash hogs in the weeks just ahead to rationalize the current stiff discount of futures to the cash market.

TODAY’S GUIDANCE: The market seems to have overly discounted the potential drop in cash hog markets into mid-July. While some product prices may be under pressure, belly demand could remain strong. The downside appears limited.

TODAY’S MARKET IDEAS: August hog short-term support is at 92.60 and 91.42, with resistance at 94.73 and 95.60. Don’t rule out a bounce to 96.62 in the short-term.

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The technical action appears to be improving for July hogs as the market managed to penetrate a significant downtrend channel off of the late April to mid-May highs and closed above the break-out. While the cash outlook is still sluggish, futures are already holding a discount. The CME Lean Hog Index as of May 26th came in at 93.78, down 29 cents from the previous session and down from 95.20 the week before. This leaves July hogs at a significant discount to the cash. The market managed a continued rally yesterday despite a weak tone to the cash market as traders are hopeful that improving weather and less pork production this week might help stabilize the cash market. Pork production last week was 420.7 million pounds, up 7% from last year. July hogs traded sharply higher on the session early yesterday with follow-through technical buying from the reversal-type action on Friday and from the discount of futures to cash. This supported a move back over 90.00 and a move to a 5-session high. Cash hogs came in $.50-$1.00 lower on the session yesterday and cash looks steady to $.50 lower for today. Pork cutout values recovered some on Friday after sharply lower trade on Wednesday and Thursday. Pork cutout values, released after the close yesterday, came in at $89.86, down 18 cents from Friday and down from $93.46 the previous week. Talk of the oversold condition of the market helped support the rally. Talk of poor packer profit margins has traders concerned with lower cash hogs again this week as pork values need to move higher or cash values lower in order to pull margins back to a more normal level. The estimated hog slaughter came in at 423,000 head yesterday. This brings the total for the week so far to 425,000 head, down from 805,000 last week at this time but up from 413,000 a year ago.

TODAY’S GUIDANCE: The export outlook remains mostly positive but the pork cut-out market suggests that exports may have slowed from the fast pace of the spring. Production is down this week but the market appears to be still absorbing the larger than expected production of the past few weeks and a sluggish movement of pork thought the pipeline. The market acts like there is a near-term low in place but it will be important to see higher trade for pork for any confirmation of a low. Negative packer profit margins will be an issue this week until cash moves lower or pork moves higher.

TODAY’S MARKET IDEAS: Support for August hogs comes in at 88.70 with 91.07 and 91.90 resistance. Support for July hogs comes in at 88.05 with 90.60 and 91.57 as short-term resistance.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

Outside market forces remain negative but solid export news and the outlook for higher cash hogs early this week plus the outlook for declining production ahead are factors which might support. July hogs closed 30 lower on the session Friday but managed to close 125 higher for the week. The market traded slightly higher early in the session but a turn down in grains, energy markets and the stock market plus a surge higher in the US dollar sparked speculative selling and a move to lower on the day. Cash hogs traded steady to $.50 higher on Friday and are called higher today, and this supported an early bounce Friday but the negative action for most other commodity markets helped spark a speculative selling trend for hogs as well. A surge in pork cut-out values last week to the highest level since April 22nd and even some strength in cash belly prices helped provide underlying support. The CME Lean Hog Index as of May 11th came in at 91.77, up 6 cents from the previous session but down from 92.42 the week before. The estimated hog slaughter came in at 375,000 head Friday and 20,000 head for Saturday. This brought the total for last week to 1.978 million head, down from 1.989 million the previous week but up from 1.958 million a year ago. Pork production for the week came in at 410.8 million pounds which was down 0.6% from last week but up 2.9% from last year. Given seasonal trends, weekly pork production for the next three months should see a rough range of 350 to 406 million pounds as compared with the range from the second week of the year through April 16th of 421 to 455 million pounds. The seasonal decline in production can sometimes support cash hogs. The seasonal may be stronger than normal this year. Pork production normally declines by about 150 to 300 million pounds from the 1st quarter to the second quarter of the year. This year, the USDA believes production will decline by 365 million pounds; the second largest decline on record. Pork cutout values, released after the close Friday, came in at $95.35, up 35 cents from Thursday and up from $90.44 the previous week. This is the highest pork value since April 12th. The Commitments of Traders reports as of May 10th showed Non-Commercial traders were net long 27,171 contracts, a decrease of 11,685 contracts for the week and the selling trend is seen as a short-term negative force. Non-Commercial and Nonreportable combined traders held a net long position of 16,055 contracts. This represents a decrease of 12,885 contracts in the net long position held by these traders. Commodity Index traders held a net long position of 103,057 contracts, down 1,071. Monthly pork exports for the month of March came in at a record high 490.66 million pounds, which was up 103 million pounds from February and up 32.5% from last year.

TODAY’S GUIDANCE: June hog support is near 93.87 and the market looks poised for a recovery rally to next key resistance points at 95.77 and 97.12. Consider buying July hogs in the 93.65 to 93.02 zone with 97.32 as short-term objective.

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While the market closed limit down yesterday, there was not much follow-through to the downside in the overnight action. However, pork production prices continued to fall led by another $4.87 plunge in pork belly prices to $127.66 from $139.83 last week at this time. Belly prices are coming down from historic highs even though the supply outlook into the summer looks tight relative to the demand. Bacon demand has been strong in the past year as more and more consumption is occurring at the restaurant and fast-food level. Pork cutout values, released after the close yesterday, came in at $91.31, down $1.12 from Monday and down from $94.82 the previous week. This is the lowest pork value since March 15th. June hogs closed sharply lower on the session yesterday and the late selling drove the market down the 300 point limit. Sell-stops were activated on the move under the March lows. The market traded slightly lower early in the session and then found aggressive fund selling to drive the market sharply lower and to the lowest level since January 5th. Cash hogs traded steady to $1.00 lower yesterday and are called steady for today. However, the further weakness in pork values suggests poor packer margins and the potential for further weakness in cash ahead. Weakness in cash belly prices was seen as a factor to spark another round of long liquidation selling from speculators and the selling continued despite news of additional tariff-free imports by South Korea. South Korea will expand tariff-free imports of pork by 20,000 tonnes, to a total of 130,000 tonnes through the end of June. The CME Lean Hog Index as of April 29 came in at 94.17, down 3 cents from the previous session but up from the week before. This leaves June hogs at a discount to the cash market. The estimated hog slaughter came in at 409,000 head yesterday. This brings the total for the week so far to 804,000 head, up from 679,000 last week at this time and up from 790,000 a year ago.

TODAY’S GUIDANCE: There is no technical sign of a near-term low but with the discount of June to the cash market during a period when slaughter might slip lower suggests that significant downside might be limited. The market slipped through key support at 93.15 for June hogs and this becomes resistance. The next key support level stands at 89.70, which is a 50% correction of the one-year rally.

TODAY’S MARKET IDEAS: Watch for signs of a short-term low for the oversold hog market. July hogs show some support at 92.77 and have become extremely oversold.

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The market saw negative price action yesterday even with positive outside market influences and this may have helped spark a strong bounce overnight. The market ended lower on the session yesterday but well up from the mid-session lows. June hogs traded moderately higher early in the session to challenge last week’s highs finding support from other commodity markets and a sharp drop in the US dollar. However, a sell-off in cattle helped spark a long liquidation trend which drove the market below Tuesday’s lows. Futures were moderately lower on the session into the mid-day with an outside trading day. Cash hogs traded steady to $.50 lower on the day. Some weakness in pork values late Tuesday added to the negative tone. Traders had expected weaker packer demand for live inventory this week due to the smaller slaughter schedule. Cash is called steady to $1.00 higher today. Into next week, packers face a full schedule and a seasonal decline in supply for the next few months and packer profit margins have held positive this week. The estimated hog slaughter came in at 413,000 head yesterday. This brings the total for the week so far to 1.214 million head, down from 1.228 million last week at this time and down from 1.220 million a year ago. Lean Hog Index for the two days ending April 18th was 94.17. Pork cutout values, released after the close yesterday, came in at $96.34, up 3 cents from Tuesday and up from $96.31 the previous week. More and more restaurants and fast food outlets are adding bacon to menu items and this has provided a base of demand during the off-season. Prices this year are already pushing $1.50 as compared with $1.10 last year at this time and the market faces a declining supply ahead. Weekly average weights for Iowa/Minnesota for the week ending April 16th came in at 272.2 pounds, down from 273.1 the previous week, but still up from 269.3 pounds last year. The data suggests that producers are becoming more current with marketings.

TODAY’S GUIDANCE: Another sharp drop in the dollar and bullish tone for commodities should help support the market today and a turn up in cash prices into next week should add to the positive tone.  June hog support comes in at 101.62 and 100.97 with 104.17 as next good resistance.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

Ideas that Japan will need to import more pork over the near-term helped support a bounce yesterday but the market was under heavy selling pressure overnight. Cash is called steady on the day and pork values were mostly steady overnight so the reason for the active selling is hard to peg. A prominent investment banker in the US urged clients to take profits on commodity long positions yesterday and overflow selling from this may be helping to spark some selling. June still holds a premium to the cash market of near 9-10 cents. June hogs closed higher on the session yesterday and managed to push to a new 3-session high. Ideas that the cash market will remain in an uptrend into next month and a firm tone to pork cut-out values on Friday helped to support. The market traded near unchanged early in the session but saw buying emerge from fund traders to support. Cash hogs traded steady to $.50 lower and this may have helped spark the early weakness but ideas that slaughter levels will tighten ahead and that the lower US dollar will help keep exports firm helped to support. In addition, traders see the cash market moving higher into the middle of this week. Ideas that packer margins are still in the black plus news that pork cut-out values were higher on Friday helped to support as well. Pork cutout values, released after the close yesterday, came in at $94.59, down 1 cents from Friday but up from $94.30 the previous week. While closing higher, the close was well off of the highs yesterday. The estimated hog slaughter came in at 403,000 head yesterday. This was down from 405,000 last week but unchanged from a year ago as this time. Lean Hog Index for the 2 days ending April 7th was 91.23. China has authorized three Brazilian pork producers to start exporting pork to China for the first time.

TODAY’S GUIDANCE: Weakness in outside markets and some speculative long liquidation selling emerged to drive the market sharply lower overnight. High open interest, high weights and sluggish packer demand are all seen as negative short-term forces.

TODAY’S MARKET IDEAS: June hog short-term resistance is at 101.37 with support back at 99.32 and 98.20.