By Cassie Fish, http://cassandrafish.com
A CME lean hog futures chart looks like a rocket ship launched into outer space. In 10 trading days, Jun LH have advanced over $14 on the idea that African Swine Fever in China has been more disastrous than reported and that at some point, China will be forced to import pork from the U.S. There are currently 3 hog contracts limit up. So far, the market has not locked limit up or gapped higher and locked limit up- but that could be coming. The CME did raise hog margins 2 days ago. The big spec money continues to buy hogs, and Oct and Dec LC 2019 and Feb and Apr LC 2020, which is supporting fall feeder cattle futures.
Indeed, as reported by Reuters last week a sale of 23,847 metric tons of U.S. pork was announced, the largest in two years and their largest pork purchase ever.
What We Know
Thanks to a great ASF recap by the great grain and oilseed analyst, Rick Feltes of RJO today, the following facts can be relayed. China has been relying on South America for protein purchases for a while now, and China is expected to look to South America for continued supply. What remains unknown is just how much protein China will purchase from the U.S. over the coming months and even years, as the that nation deals with eradicating AFS. As of yet, the retaliatory tariffs placed by China because of the trade war have yet to be removed. The majority of ASF outbreaks have occurred on small farms of 1k head or less and 1M pigs have been culled so far, resulting in a 14-month high in China hog prices. Attaché reports estimate that by the end of 2019, the China hog inventory will be reduced by 13%. The Chinese ag minister estimates currently the herd is down 16.6%. Also noted that China will import a lot fewer beans because of less feed demand.
What we don’t know is obvious- how much U.S. pork China buys and when. Many are certain China will buy millions of pounds of pork from the U.S. at some point in 2019 and have been willing to make their bets.
The remarkable strength in lean hog futures has and continues to have a positive impact on CME cattle futures. Cattle aren’t backing down from recent highs, and the fall contracts are making new highs along with fall feeders. The cattle contract continues to make new all-time highs in open interest every day, with OI in Jun LC approaching 200k contracts. Technically most of the months are overbought.
But the fear of those with short hedges is palpable and the greed of those pressing the long side on this big pork bet is too. Some cattle traders are spinning a bullish fundamental story for cash cattle and boxed beef prices for April and even May and are convinced a cash market rally is imminent.
Seasonally boxes top last week or this week though and this year doesn’t appear much different. Cash cattle prices this week could trade higher, but that would require the packer to push harder than he has. If one of the worst winters in history didn’t spook the packer, will the hog rally? The packer has done a masterful job managing inventory, buying with time and keeping supply and demand in balance. That could change of course, but will it?
Major technical resistance is just overhead in Apr LC (129.95 and 130.45) and Jun LC (124.22 and 124.80). Support lies at Monday’s low.
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