Sort & Cull

Hogs According to Hoyle

John Harrington
By  John Harrington , DTN Livestock Analyst

Near the end of a long, long year of short-term price forecasting, I'm pretty sick of my occupation's relentless calls for half-hearted opinions (e.g., "where's the market headed today, Mr. Know-it-all?). By the time Thanksgiving and Christmas pull into sight, this constant hammering of humiliation has been known to cause the cheeriest of analysts to seek career counseling.

But this year my sanity has been saved in part by the welcomed predictability of the fourth quarter hog market. Regardless whether individual players loved (packers) or hated (producers) the price action, the late-year game largely proceeded according to Hoyle.

It other words, the market essentially followed the rules of fundamental and technical implications. That may not seem as much of a revelation to some readers. But I think a decent case can be made that meat market has become increasing chaotic over the last decade. At any rate, I find it comforting whenever markets conform along conventional lines of logic.

Anticipating record slaughter and pork production, late-year lean hog futures went into a tailspin soon after Labor Day. In the first six weeks of the fall season, the December contract moved to lead the cash market lower, cutting a bearish trail as long as $17 to $18 -- exactly what a seasonal scout was likely to do given widespread estimates of weekly kill though the period of 2.5 million or better.

Moving into late October, the board started to stabilize. For the next three weeks, nearby futures banged around a narrow trading range, patiently waiting for the season's large glut of market-ready hog to meaningfully define its worst case potential.

But when the spot month broke above the lateral trading range just before Thanksgiving, the stage was set for a significant rally through the last month of the year. Again, the board was preparing to follow a well-vetted trading rule that goes something like this: the longer prices ride a market bottom, the greater the upward potential once buying energy returns.

Accordingly, the cash and futures price explosion of the last two weeks almost seemed as natural as the sun rising. Since late November, the national lean hog base has rocketed more than $10 higher, actually outpacing the board's 600-to-700-point surge.

Beyond the historical promise of chart formations, the late-year hog trade has benefited from good old country logic. The common sense interpretation of fourth quarter fundamentals is clearly working in the recruitment of new buyers.

Though producers suffered significant waves of red ink through the last third of 2016, you had to be impressed with how well both cash and product markets held up in the face of the tallest, longest wall of production ever seen. Specifically, the cash index never faltered under $47.49 (roughly $35 live) and carcass value never folded below $72.07.

Given such impressive demand performance against extraordinarily daunting supply realities, how much price improvement can we expect to see when tonnage is 3% to 7% smaller (compared with the fourth quarter) through the first half of 2017?

I suppose some could argue late-year futures are breaking the speed limit, few can seriously question that bulls definitely have the right map in hand.

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