11-01-2018: December Lean Hogs: Production Continues to Rise Despite Retalliatory Export Tariffs

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

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Introduction

Little increases in herd size and hog production can have a big impact on prices. The recent swine flu epidemic in China appears to have been the main catalyst in recently rising hog prices, but exports of U.S. pork products to China are not the main source for exports. Mexico is more of a determining factor. Our technicals along with historic prices indicate prices for pork products will continue to trend higher. We do not feel this is supported well by the news, however. Herd size and production facilitiy expansions are major inventory factors that will allow packers to demand higher margins. Still, the belief is that China will be forced to import greater quantities of pork products due to the swine flu epidemic, which imports they may acquire from countries other than the U.S., but that will still have an effect on world pork product prices.

Production is rising, but so is demand.


Intermarket Analysis

We fed Lean Hogs, Live Cattle, and Feeder Cattle into a neural network to get the following result:




Parabolic Chart

December Lean Hogs:

Parabolic Chart


Nirvana Chart

December Lean Hogs:

Initial Chart


News Analysis

China is likely to be a major buyer of pork on the world market next year which is likely to lift global prices due to the rapid spread of African swine fever. However, the short-term export demand is weak, especially to China, and cold storage stocks are high and production is still at a record high. Some support was offered by a slower slaughter pace affecting near-term contracts. Slaughter since October 1st is showing an increase of 1.63% as compared with trade expectations for a gain of 3 to 4%. Weekly weights might show an increase. The USDA estimated hog slaughter came in at 465,000 head yesterday bringing the total for the latest week so far to 931,000 head, down from 952,000 last week, but up from 907,000 from a year ago. USDA pork cutout values released recently came at $76.12, up 47 cents from the start of this week and up from $76.00 the previous week. For African swine fever there are no vaccines, no cure, and infected hogs yptically die within ten days of contradting it. Backyard farms account for 47% of China's output. A minor drop in production in China could result in massive imports on the world market. If China were to lose 16% of their herd, it would be equivalent to all of the global trade in pork for 2017.

The USDA September Quarterly Hogs and Pigs Report indicated higher animal inventories and continued additions to the inventory of breeding animals, both of which auger significant increaes in U.S. pork production. Hog prices in the fourth quarter of 2018 and 2019 will reflect larger hog numbers. Stepped-up pork production highlights the crucial nature of U.S. pork exports. Exports in August were almost 5% higher, with shipments to Mexico continuing to lead the charge.

The inventory of breeding animals was almost 3% higher than a year ago. The size of the U.S. breeding herd is imporktant because it is the main source of the processiong industry's primary input, market hoigs. In announcing the size and capacity of new processing facilities, beginning with the Clemens Food Group's announcement in December 2014 of its intention to build a new facility with capacity to process 12,000 hogs per day in Coildwater, Michigan, the expanding processiong industry has effectively announced its future animal needs. At 6 .33 million head, the 3% year over year increase in breeding inventory marked the 31st quarter since the inventory sustained more than a single quarter with a year-over-year quarterly decline. This record-long expansion accelerated in late 2014, when the first significant increase in pork processing capacity was announced. Last year, three new facilities opened: one in Michigan, a second in Minnesota, and a third palnt in Iowa. These three operations together added capacity to process about 27,300 hogs per day. A fourth facility is expected to open in late 2018, which will likely add an additional daily capacity of 12,000 head in early 2019. The U.S. hog industry has added about 410,000 breeding animals since September, 2014. Assuming annual sow productivity of about 21 pigs per year, the industry currently has the sow base necessary to produce the animals needed to supply the three new facilities now operating, and is well on its way to building the base to supply additional animals per year that the fourth new facility will demand when it ramps up production in Iowa next year. At anyi one of these facilties, second shifts would further increase the number of additional sows necessary to supply the demand for market hogs.

Third quarter pork production is estimated to be 6.3 billion pounds, a 1.4% increase over last year. The March-May pig crops implies fourth-equarter production volume at almost 7.1 billion pounds. That is about 5% above the same period last year. Carcass weights for the second half were forecast slightly lower based on recent alaughter data. Forecast commercial prok production for 2018 is expected to be 26.4 billion pounds, 3.3% above 2017's total. With expectations of continued increases in farrowings and trend growth in litter rates, supplies of hogs point to a commercial pork production next year of almost 28 billion pounds, more than 5% above the production total forecast for 2018.

This year, per capita disappearance of pork is expected to be 50.8 pounds, almost 2% above year-earlier disappearance. Next year, per capita disappearance is estimated to be 53.1 pounds. 4.4% above estimated per capita disappearance in 2018. In the past 5 years, year over year percent changes in per capital disappearance have averaged about 1.8%. U.S. exports in August were 438 million pounds, almost 5% higher compared with shipments a year earlier, despite 5% lower shipoments to Mexico, which remains the largest foreign buyer of U.S. pork products despite retalliatory tariffs imposed on U.S. pork in June of this year. The Mexican import tariff regime appears to have slowed Mexican import demand for certain U.S. pork products.

The ten largest export destinations for U.S. pork products are in order, Mexico, Japan, Canada, South Korea, China/Hong Kong, Australia, Colombia, the Domionican Republic, Philippines, and Chile. U.S. exports of fresh and frozen pork cuts to Mexico are equal with year-ago levels despite tariffs. Some processed pork products such as cooked hams and shoulders are down almost 45% in the June-August period to Mexico, which generally imports small volumes of these more-processed products, with tariffs there having a greater effect. Timing of purchases may combine with significantly higher 2018 U.S. pork production to weigh on pork prices, likeliy allowing Mexico to maintain import volumes at prices that offset most of the added cost of tariffs.

Our assessment of the news in general suggests to us there will be near-term pricing pressure on U.S. pork products despite the swine flu epidemic.


Point & Figure Chart

79.0|                                                                  R 10/31
     | CME - Dec-18 Lean Hogs, 40000 lbs., c/lb.   Cm.=0.08  Lim.= 2.8
     |
     |
     |
 74.0|____________________________X____________________________________________
     |                            XO
     |                            XO
     |                          X XO
     |X                         XOXO
 69.0|XO________________________XOXO___________________________________________
     | O            X       X   XOXO
     | O            XO    X XO  XOXO
     | O            XO    XOXO  XOXO
     | O          X XO  X XOXO  XOXO
 64.0|_O________X_XOXO__XOXOXO__XOXO___________________________________________
     | O        XOXOXO  XOXO OX XO O
     | OX       XOXOXO  XOX  OXOX  O
     | OXO      XOXO O  XOX  OXOX  OX
     | OXO      XOX  O  XOX  O O   OXOX
 59.0|_O_O______XOX__O__XOX________OXOXO______X________________________________
     |   O  X   XOX  O  XOX        OXOXO  X   X
     |   OX X   XOX  O  XOX        OXO O  XOX X
     |   OXOX X XOX  O  XOX        O   O  XOXOX
     |   OXOXOXOXOX  O  XO             OX XOXOX
 54.0|___O_OXOXOXOX__OX_X______________OXOXO_OX________________________________
     |     OXOXO OX  OXOX              OXOX  OX
     |     OXOX  OX  OXOX              OXOX  O
     |     OXOX  OX  OXOX              OXO
     |     OXO   O   O OX              OX
 49.0|_____O___________OX______________OX______________________________________
     |                 OX              OX
     |                 OX              OX
     |                 OX              OX
     |                 OX              OX
 44.0|_________________OX______________O_______________________________________
     |                 OX
     |                 OX
     |                 OX
     |                 O
 39.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
      1          11     1        11        1111
      21122346788013568902478899911245668880000
      20202101122223121022210101202000121221112
      69933162445301235672748854974692310281684
Our computer tells us a non-conventional reactive approach works best for Lean Hogs on p&f charts. Therefore the above chart is taken as giving a sell signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a strong seasonal up period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "Commodit". It is giving a sell signal.

Internal Printout 1 Internal Printout 2

Results of "Commodit" for Lean Hogs (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a longer term sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $400. Initial margin on a single contract is $1,485. Use of options is advised.


Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Lean Hogs April 50 Put and Sell (1) Lean Hogs April 74 Put @ 6.925 to the sell side or greater.


o 1 o 2 o 5

o 3

o 4


Calendar Spread

What the Jan. - Jul. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at -79.50 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -82.70 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be near the sell the far, buy the near point.





Level Table:

Level Table

The path of least resistance is up.
 77.0|                                                                  R 10/31
 CME - Dec-18 Lean Hogs, 40000 lbs., c/lb.   Cm.=0.08  Lim.= 2.8
     |
     |FF
     |
 72.0|EEEFFFFFFGGGGG___________________________________________________________
     |EEEEFFFFFGGGGG
     |DDDEEEEEGHHHHH
     |AABBCCCDEGGHHHHHHH
     |AABCCCCCDDGGGGHHHHJJ
 67.0|AABBCCCCDDDDHJJJJJJ______________________________________________________
     |AACCCCDDDDJJJJJJJK
     |AABBBBKK
     |ABBBBBBK
     |ABBBK
 62.0|BKKK_____________________________________________________________________
     |KMM
     |KLLMMMMMMMQQQQ
     |KLLLMMMMMNNNOOOOOPPQQQQQ[
     |KLLNNNNNOOOOPPPPPPQQQQRRRRXYYZ[[
 57.0|KKLLLLLNNNOOPPPPPQQQQRRRRRRRRRSXXXXXXYYYZZZ   <<<
     |LLOPPQRRRSWWXXXXXXXYYYYYZZZZ
     |LLSVWWWWWWWXXXYYYYYYZZ
     |SUVVWWWWWWXYYZZ
     |SSSSSUVVVVVVVWWWWWYZZ
 52.0|SSUVVVVVZZZ______________________________________________________________
     |SSUVVVZZZ
     |STTTTUVV
     |T
     |TTUUUU
 47.0|TUU______________________________________________________________________
     |TTUUU
     |TTTUUU
     |TUU
     |UU
 42.0|_________________________________________________________________________
     |
     |
     |
     |
 37.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 1.000
       1 1 1 1 1                                     1 1 1           1
       1 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 0           0
       0 1 3 1 2 1 3 1 2 1 2 1 2 1 2 0 2 0 2 0 2 0 1 0 1 3           3
       2 5 0 4 9 6 0 3 8 4 8 2 6 0 4 8 2 9 3 6 0 4 8 2 6 0           1


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day (10/30).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                  HEZ8    December Lean Hogs

                      High Price:  67.99
                   Current Price:  58.45
                       Low Price:  53.86

                            Risk:  0.151
                     Opportunity:  0.313

                    (O/R) Ratio =  2.078


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart + 1
Nirvana Chart + 1
News - 1
Point & Figure - 1
Cyclicals + 1
Seasonals + 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 4
Place 10 December Lean Hogs on a Buy Watch with stoploss @ -4.35 below the get-in point when recent price is represented as "58.45".
____________________________________________________________________________________________________________________________________________M.T.