Lean hogs are traded on the CME, one futures contract is equal to 40,000 lbs which is a whole lot of swine. Every penny in lean hogs equates to $400, the current price of June lean hogs is just under 73 cents. Prices for this contract month ytd have been just above 80 cents and just below 70, so currently prices are right in the middle of that range. While past performance is never indicative of future results, sometimes patterns appear when trading certain commodities and what I’m about to outline in hogs should be incredibly compelling. This is not to suggest that one can buy lean hogs and have any assurances that money will be made, but when weighing the risk vs. reward being positioned long lean hogs in March into April it’s worthy of a second look.
Buying lean hogs in the middle of April and holding until the end of the month has been a successful strategy all 8 years I’ve been operating in commodities and a profitable proposition 35 of the last 39 years. Since 1970 in the month of March, 35 out of 39 years prices have moved higher at an average rate of 10.7 cents on the month, which represents in dollars just over $4000/futures contract. This could be a fluke, however you can not ignore this has taken place 90% of the time.
The seasonal pattern that has developed in hogs can be explained as followed: pork supply is heaviest in the end of October into November, when feed grain is more abundant and less expensive due to harvest pressure. From March thru May packers typically buy, preparing for the summer grill season demand thus hog inventories start to decline. We generally see this equate to a peak in prices around May.
The demand for pork has increased in recent years, building a solid base of consumers switching to a lower cholesterol and leaner protein meat. This has helped increase the overall demand for pork, which is commonly referred to as “the other white meat.” Pork remains the world’s most popular meat by volume consumed, ahead of beef and chicken. The seasonal demand trends for protein are higher into the spring and summer. The production cuts resulting from last year’s high feed costs have lightened supply too, bringing higher wholesale and retail prices. The meat industry, like so many other sectors, is reeling from declining global demand but unlike many other commodity sectors, where you can flip a switch scaling back exploration/operations, animal life cycles prevent the livestock producers from reacting swiftly to market signals. That being said, prices are down just over 30% from their summer highs and in the lower quadrant of prices in recent years and we think scaling into longs looking to be in the trade for 1 to 2 months is a viable strategy.
When searching for an entry in lean hogs remember the cure for a low price is a lower price. Furthermore the most recent stimulus in the US, in addition to China, may help reinvigorate the demand for pork and other agricultural imports. With packers losing money they will continue to scale back demand until the rubber band snaps and prices revert to the mean which should take prices higher by at least a dime.
Possible trade ideas in June lean hogs include:
Buy 74 or 76 calls outright for $1200 and $800 respectively. Sell the 74 call and simultaneously get long the futures. Sell the 74 put collecting $90 and use that for premium to purchase calls. Get long the futures and simultaneously purchase the 70 or 72 put for protection, $950 and $1200 respectively.
Continuation chart of Lean Hogs
It is for these reasons that lean hogs look so attractive, on any pullbacks buy dips. To get specific trading strategies on lean hogs or any other commodities you wish to play contact us via MB Wealth or (954)-920-9997.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.
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