Lean Hogs: Bullish Bias
Lean Hogs may be poised to reach new highs, as global demand picks up and supplies remain tight. After reaching all-time record highs of over of 88.10 cents per pound in November 2012, hog prices beat a swift retreat to 84.00 cents on Jan 14, as the higher prices led producers to bring more of the beasts to slaughter. Producers had a particularly rough 2012, selling their herd for an average of a $17 loss per head. High grain prices were the main culprit of the deficit, but also contributing was a weak per pound weight with the average hog weigh in at just 207 lbs vs. an average of 210 lbs. Bacon could possibly come in short supply with those numbers.
Since the beginning of the year, prices and the outlook have rebounded, leaving producers enthusiastically looking for higher margins as they see softening grain prices and respectable prices in 2013. Seasonally, Hog futures tend to experience a rise in prices from January 15 to February 15, having done so in eight of the last 10 years. In the US itself, prices are "still not high enough to spur higher pig production" to offset extra demand pressure (Futures Magazine).
In fact, feed price induced declines in production have resulted in the lowest ending stocks in over 15 years (Agrimoney.com).
However, several factors could stall the upward move at these levels. Despite predicting tight supplies, inventories remain persistently high, with the USDA report on December 28 showing slightly higher numbers than the market had expected (Farm Futures 12-28-12). In fact, yesterday afternoon USDA Cold Storage report showed December pork in cold storage declining from November but narrowly missing setting an all-time high for the month of December (Minn Farm Guide 1-23. Technically speaking, the market will reach major resistance as prices test the 88.00 cents per pound level reached in mid-December.
Commodity prices overall have languished so far in 2013, as investors and funds have rushed into equity markets. Timing could be just right for a turnaround with some analysts now recommending an overweight position in lean hogs, forecasting an improvement in pork prices in China, the main consumer of the meat. "Chinese imports of US pork have moderated, but should pick up again through 2013," SocGen analyst Jeremy Friesen said (Agrimoney 1-17). Lean hog futures have proven to be one of the most reliable for gains among agricultural commodities. A tightening supply environment, coupled with strong export demand, should limit any downside move in the near-term (Bloomberg 1-17).
Investors and advisors should take a look at commodity futures, particularly managed futures, for inclusions into a well-diversified portfolio thereby positioning themselves for large price moves as the global economy improves. So let's enjoy our bacon before prices become out of reach.
The Survival Plan and the Diversified Commodity Basket are trade Lean Hog Futures and are currently long.
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