Technically Speaking

A long-time veteran of the hog industry sent me an email recently. This gentleman, if I recall correctly, runs a processing plant on the East Coast (though don't hold me to that, it has been years since I last visited with him). Anyway, he asked if I still had my chart mapping the 3 to 4 year, 6-point cycle in hog prices (monthly futures price closes only), wondering if he would see the next cycle bottom before he died.

That sent me on a quest to find the chart, update it, and get it posted again on DTN (the last time was back in 2006 or 2007, I think). Now, many of you don't know what that entails. My computer being a Dell, I naturally have a version of Windows Excel. In this program there are, by rough estimation, literally thousands of charts that I've created since joining DTN back in January 2004. Many of the workbooks in the program are creatively labeled "Book 1" or whatever count the computer is up to, with pages in those workbooks often titled "Chart 1" through "Chart 20", or "Sheet 1" through "Sheet 6". Those I work with in the analysts' corner of the newsroom just shake their head at the disorganization of the filing system.

Given that system, finding a specific chart from nearly a decade ago is like finding the Ark of the Covenant after it was stored in the labyrinth of the government warehouse at the end of the first (and in my opinion best) Indiana Jones movie.

But find it I did. Oddly enough, a simply search of the phrase "Hog Cycle" quickly located the missing file. Who would have bet that I had actually given it a correct title?

With that back story out of the way (and I appreciate you staying with me to this point), what about the analysis? Does the long-term cycle in hogs still hold true, or has it been blown up by recent years of increased volatility?

I started this study back in the early 1990's when as a broker I had a number of customers needing to hedge hogs (chuckle) as price risk management. After looking at the long-term monthly close chart (nearby futures) I noticed that the space between peaks (Point 1) and valleys (Point 4) seemed to be relatively evenly spaced for a volatile commodity market. Upon closer inspection I noticed that between each peak there were similar, but not identical, waves of highs and lows. As it turned out, each move consisted of six points where the market changed direction, before the beginning of the next cycle.

The attached chart comes from DTN ProphetX, showing monthly closes back to 2002. This replaces my original excel file that had become too condensed given the amount of data it had to show. This chart picks up at the midpoint of the April 2000 to October 2003 cycle, showing the low Point 4 that occurred in August 2002 at $30.875 (remember that?). The next cycle began (Red Point 1) with the high monthly close of $78.95 in June 2004.

Let's break the cycle down point by point:

Point 1 (the cycle high) tends to occur in the April-May-June quarter, with a 100% record over the last 8 cycles (including the one that looks to have started in June 2014, far right side of the chart, blue "1"). Analyzing the space between these eight "1"s shows a different cycle: two 36 month periods (approximately) followed by two cycles ranging from 47 months to 50 months. The recently completed cycle from "1" to "1" was 50 months, meaning the next cycle could be in the longer range.

Point 2 tends to occur in the August to October quarter, only once hitting in November (1993). If June 2014 is indeed this cycle's "1", point 2 could occur late this September.

Point 3 tends to occur the following April-May-June quarter, meaning hogs would be expected to post a secondary high in May 2015.

Point 4 is the wildcard, and also the cycle low. It is the point most responsible for the variability between 3 years and 4 years. The time from point 3 to point 4 can range from 5 months (2008) to 19 months (1994). Using the median average of the previous seven cycles, this time around point 4 could occur in August 2016.

Point 5 moves back to the April to June quarter, with this cycle projecting to land in May 2017.

Point 6 finishes off the cycle, with November 2017 as the target month. From there the next cycle would be expected to being in May 2018.

To my friend back east, thank you for the reminder to take another look at this chart. To everyone: It will be interesting to continue to watch how this plays out.