Lean Hog February 18, 2020
Weekly hog slaughter fell to 2.596 million head. That was under our 2.604 morning estimate. This new number is good news for two reasons. This week’s run was the smallest non-holiday kill of the year. Secondly, it was only 3.9% over last year. That is a clear divergence from the previous six weeks that averaged 6.2% over last year. We expect this new production level will remain in place for a few more weeks. This should have happened a full month ago according to the December Hogs and Pigs report weight breakdowns.
As noted in the previous two days we are also monitoring weights closely. Wednesday's Iowa/Minnesota hog weight report showed a decline from +0.5% year/year as of 2/1 to now -0.1% as of 2/8. Thursday's Actual Slaughter report covers the whole-US numbers. However, it is from a week before that regional report. This report showed no change in the +0.5% year/year weights from the week of 1/31 to 2/1. Again, these are different weeks. Will next Thursday's Actual Slaughter report show the same decline for 2/8? Between the confirmed "number of head" issue and the maybe "changing weight" issue, supply has changed.
The coronavirus story took a wrong-way turn on Thursday and today as China changed the definition of a new case again. As of today China now has 63,851 infected. That is an increase over the prior day by 5,090. The death toll comes to 1,380. Bears point to the fact many major cities are still quiet despite the lifting of restrictions on business activity. A Reuters newswire poll of economists across Asia, the US and EU estimate China's Q1 will see GDP at 4.5% year/year growth. That would be down from the 6.0% growth in the completed Q4. They see the whole 2020 growth at 5.5%. Bulls point to the fact there is some change in business activity, albeit a slow return. They also suggest the peak in media attention is also behind us.
Today's 56.70 Lean Hog Index reported by CME Group is good through Wednesday's cash hog trading. We compute that USDA's report this morning, covering Thursday's cash hogs, will mean CME's next update will be 56.38. This still does not show Friday's cash hog trading though, the last step for settlement with today's expired 55.90 February futures. With today's lower cash hog trading it appears futures will settle out in the 55.70 - 56.15 range.
We're not too concerned about the "right now" cash hog trading. The break in the LHI, reflecting generally lower cash hog prices in the past two weeks, is due to the oversupply issue combined with coronavirus/concerns about the trade deal. One of those issues has changed (US supply). We expect cash hogs to stabilize in the coming days.
We don't have any strong opinions on how aggressive China could buy US pork in the coming days. It won't be until mid-March that we can make a clear opinion on it. The phase one trade deal starts on Saturday. Given their virus issue and problems offloading imports at the ports we don't expect anything major next weeks. As a reminder, we expect US pork exports to China in 2020 to more than double 2019. Allendale forecasts the trade deal for "pork and pork products" at 1,190,000 metric tonnes for 2020. That would be more than double the 472,811 from completed 2019. If we divided up the estimate between the 45.7 weeks of the year from 2/15 - 12/31 then our weekly "pork and pork products" sale to China would run 26,031 metric tonnes. As a reminder, the weekly FAS numbers you see each Thursday do not include organ meat or "pork products". Cutting those out you're looking at 20,000 tonnes each week. Until we see that number listed in the weekly USDA FAS export sales report we'll stay a little skeptical in the short term. As a reminder, yesterday's report showed a weak 3,715 tonnes in sales for 1/31 - 2/6. The previous four weeks ran from 1,506 - 5,126 tonnes. As tonight's chart shows, don't get excited about "big" year to date sales to China. Those sales are old news and were posted in October and November.
In the short term we hope to use this "waiting for China to buy" period between now and the end of the month as a time to start a long speculative trading plan into summer. With our full export projection met, April would be at $75 and summer contracts from $84 - $89. Assuming no phase one trade deal, and the same exports as 2019, April would be priced at $62 and summer at $74 - $76. We see little real downside risk remaining for the April at current pricing...Rich Nelson
Trade Recommendation:
(2/14) Buy April $62.87, risk 60.45, objective 71.20.
Working Trade:
(2/7) Sold April $60 put 2.30, risk to 3.40, objective 0. Closed 1.72.
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