The Hightower Report

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The short-term trend looks to remain down over the near-term, but the downside may be somewhat limited as futures already hold a decent discount to the cash market, and global economic growth and “less fear” of a slowdown in global growth could provide some support if exports remain strong. Exports represent nearly 20% of the total pork production. Weekly slaughter should continue to climb, and is already at the highest level since April and should post highs for the year in early December. October hogs closed slightly higher on the session yesterday, but down 120 points from the highs. The pit trade has closed in the vicinity of the lows for five sessions in a row. Weakness in the cash market and ideas that slaughter will continue to increase in the weeks ahead helped to pressure. The market pushed lower and matched Friday’s lows and the lowest level since August 17th, but a lack of new selling interest and a strong recovery in financial and metal markets helped provide some underlying support. There was some buying based on the steep discount to the cash market, and the move over Monday’s highs activated buy-stops and the market surged to sharply higher on the day into the mid-session. Cash hogs came in steady to $1.00 lower; about as expected in some locations but higher in the west. The estimated hog slaughter came in at 408,000 head yesterday, which was lower than expected and could be showing a weaker demand tone from the packer. Traders are a bit nervous that demand will not keep pace with the rising seasonal supply into the 4th quarter, and that this could back-up some animals in the country unless exports can remain strong. This brings the total slaughter for the week so far to 819,000 head, up from 815,000 head last week at this time but down from 868,000 head a year ago. The CME Lean Hog Index as of August 27th came in at 83.89, down 47 cents from the previous session and down from 84.13 the week before. This leaves October hogs at an 875 point discount to the cash market. Pork cutout values released after the close yesterday came in at $91.23, down $2.03 from Monday and down from $96.74 the previous week. This is the lowest pork value since August 16th, and pork values are down 5.7% from last week’s all-time high. Loin prices were down sharply and rib prices fell $9.12 to $123.51, which may be a strong indication that retailers are done booking product for weekend sales.

TODAY’S GUIDANCE: The technical action remains weak, and the COT report showed fund traders holding a net long position of near 48,000 contracts, so some additional long liquidation selling is still possible if support is violated. Next support for October hogs comes in at 73.97 and then 72.10, with 75.20 and 75.97 as resistance.

TODAY’S MARKET IDEAS: The market looks vulnerable to more fund trader long liquidation selling over the near-term.

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Big profits from the packer and the discount of futures to the cash market should help to provide some temporary support to the market, and the lower than expected slaughter pace for the past month along with suspicions that export demand remains strong are additional supportive forces. October hogs pushed sharply higher on the session yesterday, and held on to those gains to close strong. Cash hogs traded steady to $1.00 higher, as compared with trade expectations for steady to lower trade. This occurred late last week as well with traders looking for weak packer demand and lower cash on Thursday and Friday, but the cash trend and the pork cut-out value trend continues to support strong packer margins which leaves packers with the incentive to pay up in the cash market. Cash hogs are expected to trade steady to $0.50 lower for today. Packer demand has been stronger than expected. The spread between the pork cut-out and nearby futures is at the highest level since August of 2008, when China buying drove pork values to the previous record high before pork rallied to a new all-time high on Friday. The higher pork trade late Friday supported the early strong gains today. Pork cutout values released after the close yesterday came in at $97.79, up $2.30 from Friday and up from $91.19 the previous week. However, a later release of the cut-out from the USDA showed cut-out up 18 cents to $95.67. The adjustment down is still a record high, but the market remains nervous of a seasonal peak in pork values and a seasonal increase in production for the September to November timeframe. The CME Lean Hog Index as of August 19th came in at 83.78, up 1.01 from the previous session and up from 82.92 the week before. The estimated hog slaughter came in at 410,000 head yesterday. This was up from 407,000 head last week but down from 422,000 head a year ago as this time. Slaughter has been coming in below trade expectations for the past several weeks, and traders see part of the reason for the decline being due to too much heat in July and August which can slow weight gains. Pork production for the week was down 7.1% from last year, and this helped to support the market last week.

TODAY’S GUIDANCE: With a new high in pork cut-out, new sellers might be tough to find and short traders are vulnerable to covering. Look for support for October hogs at 77.47 and 76.70, with 78.75 and 79.30 as good resistance.

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October Hogs are already down as much as 522 points off of Monday’s contract highs, with much of the break coming yesterday and overnight. Ideas that the high pork values of the past few weeks will eventually cause a significant decline in demand helped to spark the selling, and long liquidation selling from speculators was the added force to drive the market lower. The market pushed sharply lower on the session yesterday, as funds turned active sellers early in the day based on weaker cash markets and fears of a minor bump in near-term supply during a period of weaker demand. Cash markets were lower than expected yesterday, and there was a perception that the market has become overbought recently. The short-term supply could jump due to sharply higher grain prices, and this helped drive the market sharply lower even though corn prices moved from sharply higher to lower on the day. August was trading at a significant premium to the cash market and when cash hogs traded steady to $2.00 lower on the day, selling became active. Cash markets are called $2.00 lower for today. Ideas that the Midwest may be too hot next week to move hogs added to the negative tone, as traders see the possibility that producers will want to move those hogs this week ahead of the heat. The CME Lean Hog Index as of August 3rd came in at 85.12, up 59 cents from the previous session and up from 81.80 the week before. The estimated hog slaughter came in at 402,000 head yesterday. This brings the total for the week so far to 1.548 million head, down from 1.565 million head last week at this time and down from 1.588 million head a year ago. Pork cutout values released after the close yesterday came in at $90.63, down 85 cents from Wednesday but up from $89.38 the previous week. Actual US pork production for the week ending July 24th came in at 393.9 million pounds, down from 403.2 million pounds the previous week and down 3.2% from a year ago.

TODAY’S GUIDANCE: Follow-through aggressive selling yesterday, after a key reversal from a contract high for August Hogs on Wednesday, is seen as a bearish factor and confirmation that a significant top is in place. October hog selling resistance comes in at 76.85, with next support back at 74.72.

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Cash pork prices continue to advance, providing strong incentive for packers to keep bidding for cash hogs. On top of that, hot weather in the Midwest is expected to limit marketings, which make packers more aggressive in their buying. Pork cutout values were up another 12 cents after the close yesterday, and while that gain is not as strong as some of the $1-plus gains of the past week, it took cutout prices to their highest levels since June 1st! August hogs closed slightly higher on the session yesterday, but well off of the early highs. Weakness in other commodity markets and the outlook for cash to trade steady to $1.00 lower today helped to pressure the market later in the day. Packers appear to have the hogs they need for the week, and some plants will see downtime on Friday and Monday. August hogs still hold a premium to the cash market so if cash is weak, we could see a bit more long liquidation selling from the funds before the market stabilizes. The market saw strong gains early yesterday, due to news of higher pork prices late Monday. In addition, cash hogs came in steady to $1.00 higher yesterday despite expectations for only a steady trade. The CME Lean Hog Index as of July 23rd came in at 80.81, up 98 cents from the previous session and up from 77.90 the week before. The estimated hog slaughter came in at 378,000 head yesterday, which was below trade expectations and is sometimes considered a sign of weaker packer demand. This brings the total for the week so far to 764,000 head, down from 770,000 head last week at this time and down from 832,000 head a year ago. Pork cutout values, released after the close yesterday, came in at $86.86, up $0.12 from Monday and up from $84.03 the previous week.

TODAY’S GUIDANCE: Packer margins are in the black, and pork demand appears to be much better than traders have expected. Exports appear active, and traders expect continued tight supply ahead. October hog support is at 75.55 and 75.12, with 77.37 and 78.75 as the next upside targets. Look for the choppy to higher trade to continue.

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Strong export demand and forecasts for lower production over the next month or so could keep the hog market well-supported, despite some disappointing cash market prices over the past week or so. August hogs managed an abrupt about-face yesterday, forming a key reversal to the upside. We recall that it was a sweeping reversal DOWN last Friday that appeared to set the negative tone to the market earlier this week. Yesterday’s rally erased all the losses since that reversal, as the market traded to its highest level since July 2nd. The move was helped along by bullish export data, as the USDA reported US pork exports for May totaled 362.8 million pounds, up from 352.7 million in April and 306.9 million a year ago. Exports claimed 22.4% of pork production in May, the highest percentage since June 2008. The stronger stock market also lent support, and the weaker dollar improves the export outlook. The CME Lean Hog Index as of July 12 came in at 78.65, down 40 cents from the previous session and down from 80.43 the week before. The estimated hog slaughter came in at 404,000 head yesterday. This brings the total for the week so far to 1.195 million head, up from 1.164 million a year ago. Hogs are not getting much support from the cash pork market. Yesterday’s cutout values, released after the close, came in at $81.15, down 97 cents from Tuesday. While this was up from $80.99 the previous week, it was their second lowest level since April 12th. Feeder Pig imports from Canada for the week ending July 3 came in at 65,787 head, down from 67,603 head the previous week and below the 4-week moving average of 77,519. Feeder pig imports for the year have reached 2.4 million head, down 10.3% from last year. Total hog imports reached 84,470 for the same week, down from 86,415 the previous week and below 4-week moving average of 96,847. Cash hogs are expected to trade steady to lower today. Some scheduled plant closings Friday and Monday could keep packer demand lower over the next few sessions. The monthly export data that was released yesterday was for May, which is a significant time lag. While that was bullish news, a better indicator of how export movement is going might be cash pork prices, which includes the daily cutout and individual cuts such as loins. If the recent trend of lower pork prices reverses, it could provide a more current indicator of improving export demand.

TODAY’S GUIDANCE: Yesterday’s reversal to the upside outdid Friday’s sweeping reversal to the downside in both scope and volume. Initial upside targets include retracement levels at 82.05 and 82.775, and eventually the June 22nd high at 85.10.

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The market saw a nice bounce yesterday but the cash fundamentals still look sloppy into next week as weakness in pork values this week and ideas that the strong dollar and a weaker global economy view could hurt US exports has helped to pressure. August hogs rebounded off of Tuesday’s lows buoyed by the sharply higher action in corn. A slightly lower dollar and slightly higher stock markets were also supportive, but limit up action in corn and the strong action in the cattle market were likely the dominant influences. Higher corn values are supportive to the December and beyond contracts but might be considered negative for nearby contracts. On the negative side are expectations that packers will cut back operations sharply over the holiday weekend, which could cause a backup of animals in the country. Weights are already high and at least three plants will close on Friday and most on Monday. Weekly average weights from Iowa/Minnesota for the week ending June 26th came in at 269.7 pounds, down from 270.6 the previous week but still up from 265.1 pounds last year. Weights remain well above last year and the 5-year average and should be headed lower at this time of the year so the drop this week is NOT considered supportive. The CME Lean Hog Index as of June 28th came in at 81.11, down 7 cents from the previous session and up from 80.34 the week before. The estimated hog slaughter came in at 403,000 head yesterday. This brings the total for the week so far to 1.199 million head, up from 1.165 million last week at this time but down from 1.246 million a year ago. Pork cutout values, released after the close yesterday, came in at $81.80, down 86 cents from Tuesday and down from $83.80 the previous week. This is the lowest pork value since June 16th. Rib prices have fallen sharply in the past few sessions; an indication that retailers are done purchasing for the holiday weekend. Feeder Pig imports from Canada for the week ending June 19th came in at 91,958 head, up from 84,727 head the previous week and compared to a 4-week moving average of 86,357. Feeder pig imports for the year have reached 2.27 million head, down 8.7% from last year.

TODAY’S GUIDANCE: It will be important to see a jump in pork cut-out values early next week as a slowdown in slaughter on Friday and plant closures on Monday should tighten near-term supply. Demand indicators are weak this week and this should be seen as a limiting force for rallies and might encourage more long liquidation selling. A potential back-up of market-ready hogs in the country is possible, which has added to the short-term negative tone.

TODAY’S MARKET IDEAS: August hog resistance comes in at 82.87 and 83.40 with next good support back at 79.47. The market may need to correct the overbought condition before building another base of support. Watch for choppy to lower trade into next week.

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A steady tone for the cash hog market has helped to provide some support this week but the premium structure of August futures to the cash may be a limiting factor ahead of a key report for Friday. Weakness in pork overnight and demand for meat in general is a growing concern. A bearish tone for outside markets and signs of a weakening US economy were factors which helped the hog market give back part of the recent gains. Positioning ahead of Friday’s USDA Hogs and Pigs report and talk of the overbought technical condition added to the negative tone yesterday. Cash markets had a positive tilt and the cold storage report this month was supportive but this news failed to provide much support to the market and futures drifted lower. The futures premium to the cash market was also viewed as a slight negative. The CME Lean Hog Index as of June 21st came in at 80.33, up 51 cents from the previous session and up from 77.83 the week before. The estimated hog slaughter came in at 399,000 head yesterday. This brings the total for the week so far to 1.165 million head, down from 1.201 million last week at this time and down from 1.227 million a year ago. Pork cutout values, released after the close yesterday, came in at $83.80, down 48 cents from Tuesday but up from $81.34 the previous week. Hams and loins were lower and traders are somewhat concerned that the export market may be slowing due to weakening world economy. Weekly average weights for Iowa/Minnesota for the week ending June 19th came in at 270.6 pounds, down from 271 the previous week and up from 268.7 pounds last year. Feeder Pig imports from Canada for the week ending June 12th came in at 84,727 head, down from 88,535 head the previous week and compared to a 4-week moving average of 84,223. Feeder pig imports for the year have reached 2.18 million head, down 8.7% from last year. For the pig report for release on Friday, traders see little in the way of changes from the March report. In other words, producers did not expand or further reduce the herd much. Market hog supply is thought to be near 3% below last year and breeding hogs down 4% from last year.

TODAY’S GUIDANCE: The market has the supply fundamentals to see further appreciation ahead, but it will be important to see solid demand news. Weak pork values late yesterday and a weak stock market overnight do not help. August hogs are on a nice recovery rally off of the June 7th lows but a bit overbought.

TODAY’S MARKET IDEAS: August hogs next resistance is at 86.00 with some light resistance at 84.55. Support back at 82.47 and 81.65. New buyers may want to wait for a more significant correction before entry.

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Packer profit margins are in the black and supply is coming down so the pop in pork cut-out values in the past few sessions could go a long way in shifting the psychology in the market to a more positive tilt. July hogs tested Thursday’s lows early on Friday but managed to hold support and strong buying emerged to support a run to sharply higher on the session and above Thursday’s highs. Ideas that cash hogs could trade firm this week helped to support. In addition, a jump in pork cut-out values late Thursday was seen as a positive development. Monthly pork exports for April were reported at 352.7 million pounds which was down from 370.4 pounds in March but up 2.2% from last year. Weakness in the cattle pit helped pull hogs off of the highs late in the day. The CME Lean Hog Index as of June 9th came in at 78.39, down 41 cents from the previous session and down from 80.11 the week before. This leaves July hogs right in line with the cash market. A general feeling that cash hogs could inch higher or at least stabilize this week is helping to provide underlying support. Supply is expected to continue to decline in the weeks just ahead and a sharp break in the US dollar could be seen as a positive development for export demand. The estimated hog slaughter came in at 371,000 head Friday and 46,000 head for Saturday. This brought the total for last week to 2.026 million head, up from 1.791 million the previous week but down from 2.079 million a year ago. Pork production for the week was down 2.5% from last year and cumulative production for the year is down 4.2%. Pork cutout values, released after the close Friday, came in at $83.99, up 37 cents from Thursday but down from $84.78 the previous week. The Commitments of Traders Futures and Options report as of June 8th for Lean Hogs showed Non-Commercial traders were net long 29,269 contracts, a decrease of 13,728 contracts for the week and trend-following funds reduced their net long by a similar amount and now hold a net long of just 15,897 contracts. The selling trend from the fund traders is a negative short-term force but may be nearing an end. Commodity Index traders held a net long position of 87,533 contracts, up 191 for the week. Cash is called steady to $.50 higher today and outside market forces are supportive.

TODAY’S GUIDANCE: The packer is still profitable and the market seems set to absorb improving cash fundamentals in the next week or so. We caution against turning too bullish until there is a better gauge on short-term consumer demand with mixed signals in the past few weeks. Once the market sees a clean up of the short-term supply, futures are likely in a position to bounce. A record volume day last Monday seems to have stopped the fund long liquidation selling and a near-term low could be in place.

TODAY’S MARKET IDEAS: July hog buying support moves up to 77.92 and 77.42 with 78.92 and 80.55 as near-term resistance.

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The big discount of futures to the cash market may provide some support in the event of a recovery in the financial markets. A surge in US equity markets overnight, combined with a sharp slide in the US dollar, should provide some general support to commodity markets and to the meat markets to start the day. We are a bit concerned on the bull case due to rising average weights during a period when weights typically come down. Perhaps the exceptionally good weather in May for weight gains caused the higher weights, and the recent hot and humid weather will pull weights down but for now, this is a negative force. Weekly average weights from Iowa/Minnesota for the week ending May 22nd came in at 270.8 pounds, up from 270.3 the previous week and up from 268.1 pounds last year. Last year’s weights were relatively high, with the 5-year average near 267 pounds. The market managed to push higher on the session yesterday, despite weakness in the cash market and the outlook for lower cash hogs again this morning. One less slaughter day next week combined, with expectations of a small slaughter for Saturday, has helped pressure the cash market this week. The lack of pressure from the stock market and strong gains in other commodity markets helped slow the aggressive fund trader selling seen in recent days, and helped support some new buying. The discount to the cash market and ideas that cash hogs could see some stability or even higher trade next week helped to support. The CME Lean Hog Index as of May 24 came in at 84.83, down 77 cents from the previous session and down from 87.31 the week before. The estimated hog slaughter came in at 395,000 head yesterday. This brings the total for the week so far to 1.135 million head, down from 1.189 million head last week at this time but up from 865,000 head a year ago. Pork cutout values, released after the close yesterday, came in at $87.45, down 10 cents from Tuesday but up from $87.21 the previous week. Feeder Pig imports from Canada for the week ending May 15 came in at 91,265 head, up from 85,332 head the previous week and compared to a 4-week moving average of 86,947 head. Feeder pig imports for the year have reached 1.84 million head, down 8.3% from last year.

TODAY’S GUIDANCE: Cash demand is slow this week, but could pick-up next week and the stiff discount could then be a more important force. High weights are a slight negative, but hot weather this week may have already corrected this situation. Easing of the long liquidation selling sparked by equity market weakness may be all this market needs to see a significant bounce.

TODAY’S MARKET IDEAS: Buying support for July hogs comes in at 81.77 with 83.40, and 84.25 as initial resistance. A move through 83.00 would confirm the May 21st reversal low and leave 84.22 as a near-term upside objective.

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July hogs have consolidated in a trading range since late March, and we believe the market will eventually break-out to the upside. Declining slaughter into the summer and a firm tone to exports are factors which should continue to support the cash market. The surge in pork cut-out values to 21-month highs this week helped boost packer profit margins, and this should spark higher cash markets next week. Cash is called steady today. The hog market closed slightly higher in quiet trade yesterday. The strong gains in pork cut-out values to the highest level since the summer of 2008 helped to support the market, while buying was limited due to steady to lower cash trade and weakness in cattle. Ideas that producers are cleaning up any backlog of hogs and a slight drop in average weights were seen as positive developments. The CME Lean Hog Index as of May 10th came in at 88.70, down 2 cents from the previous session and up from 85.90 the week before. The estimated hog slaughter came in at 397,000 head yesterday. This brings the total for the week so far to 1.165 million head, down from 1.188 million head last week at this time and down from 1.221 million head a year ago. Pork cutout values, released after the close yesterday, came in at $91.30, up 59 cents from Tuesday and up from $89.66 the previous week. This is the highest pork value since August 19th of 2008. Weekly average weights from Iowa/Minnesota for the week ending May 8th came in at 270.1 pounds, down from 270.5 the previous week and up from 269.4 pounds last year. Feeder Pig imports from Canada for the week ending May 1st came in at 82,643 head, down from 88,549 head the previous week and compared to a 4-week moving average of 90,279 head. Feeder pig imports for the year have reached 1.66 million head, down 7.5% from last year. Pork exports for March totaled 370.4 million pounds, up from 361.6 million in February and up 0.2% from last year. Exports represented 18.16% of the total production for the month.

TODAY’S GUIDANCE: The tightening supply into the summer and the recent pop in packer margins should help provide some underlying support.

TODAY’S MARKET IDEAS: Corrective breaks appear to be good buying opportunities as the cash market tone should improve into next week. Buying support for July hogs comes in at the 84.40-84.25 zone, with 86.35 as close-in resistance.