Traders indicate that fund traders were liquidating long hog futures contracts yesterday because the market failed to move higher as outside market forces (stock market, US dollar, gold) signaled a "risk on" appetite. However, surging pork production and continued signs that cash hogs could remain under pressure appear to be the primary reason for the selling. Open interest has increased to the highest level since mid-July and continues to inch higher as the market pushes down into new contract lows.
While the recent USDA Hogs and Pigs reports suggest that hog slaughter should be running 1-2% above last year, actual US hog slaughter for the week ending August 25th came in 10.8% above last year and this follows increases of 6.6% and 4% for the previous two weeks.
Pork production for the week ending August 25th came in at 457.6 million pounds, up from 437.5 the previous week and up 12.3% from a year ago and this follows increases of 8% and 5.3% the previous two weeks. The 5-year average pork production is just 422.9 million pounds and does not jump to the 450-460 level until late October into November.
October hogs closed 187 lower on the session yesterday and drove down into new contract lows. Estimated losses per head for the 4th quarter continue to spark selling pressures as traders remain fearful that breeding stock liquidation will continue ahead. The jump in corn values helped to pressure.
The market traded near unchanged early yesterday but saw a steady flow of selling pressure to drive the market lower. Cash hogs were down $1.00-$1.50 on the day and traders see the October discount to the cash market as "less" of a supportive factor as the spread has narrowed significantly over the past 2-3 weeks.
The CME Lean Hog Index as of September 4th came in at 77.29, down 1.31 from the previous session and down from 84.80 the week before. A sharp break in pork values to the lowest level since May was seen as a bearish force as traders see collapsing pork values as a "reason" to suspect a continued decline in cash markets.
Slaughter came in above expectations at 434,000 head. This brings the total for the week so far to 1.306 million head, down from 1.726 million last week at this time but up from 1.287 million a year ago. Pork cutout values, released after the close yesterday, came in at $78.56, up 50 cents from Wednesday but down from $82.59 the previous week. Values are bouncing off of the lowest pork trade since May 25th. A bounce in loin prices helped to support.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.