My initial reaction is that it is quite friendly towards the nearby months and neutral to bearish towards the very distant 2015 months.
Some of the negativity towards those months may have already been priced in with the sharp move lower in those contract months throughout this week.
Hog producers, (and cattle ranchers) - please check in later on and I will get those comments up.
Also, for the grain guys out there, we have a big USDA report coming out Monday AM. I will be remarking on that as well.
In looking over today's Quarterly Hogs and Pigs Report, once again, the report lived up to its habit of being one of the most unpredictable, volatile reports that USDA publishes. Last Quarter (March) the report threw the entire trade an enormous curve ball as it was decidedly bearish on the surface when nearly the entire industry was looking for a bullish report.
This Quarter's report was the exact opposite - it was decidedly bullish when most in the trade were looking for a bearish report!
Translation - there will be fireworks come Monday morning in the hog pit. Based on the report, I would not be surprised to see the August and October contracts open limit up, and with the December's possibly there as well. The July should also be well bid.
The reason? the report showed fewer hogs around than the industry was expecting. This is the result of the PED virus which has been, and still remains a serious issue for hog producers.
Here is some of my analysis which was sent off to some of the newswire reporters:
The number of sows that actually farrowed during March-April was much lower than the number that farrowed the previous three months. It does look as if earlier this spring, producers were very nervous after coming off those flare up in disease incidences being reported. Again, that should be friendly towards the August – September time frame and into October.
One other thing - based on the Monthly aspect and the weight breakdown data – late August, early September should see some significant tightness in the supply side of things. The pig crop for March was especially tight coming in nearly 7% lower than last year! April’s pig crop is at 94.5% of last year. By last month, May, we were back to 96% or a 4% reduction.
One wild card is though intentions are obviously very high for the Sep-Nov time period ( 4% above last year) we do not yet know what kind of impact the disease might have as the weather turns cooler and damper. If the expected recently approved vaccine is effective ( and we do not know yet how effective it might or might not be), the herd will be expanding significantly by next year.
Based on my preliminary reading of the report, it looks as if the front months should still continue to outperform the distant 2015 contracts.
The USDA showed the expected mortality rate from the disease lessening or improving positively as the spring has worn on. You can see the improvement in this years 2014 pigs per litter numbers as the spring progresses.
March 10.24 9.58
April 10.30 9.78
May 10.38 9.98
While the pigs per litter number is being impacted from the virus, USDA is looking at the numbers and telling us that the impact from the disease will lessen as the weather warms. That is consistent with what we saw last year.
Hog producers out there - keep an eye on the price action for those distant hog contracts in Q1 2015. If you got some downside hedge protection in the Feb's for example over the last couple of weeks, you should be okay on those, as the contract has dropped over 750 points the last two weeks.
While I do not see anything especially bullish about a 104% intentions number for the fall, the intentions are the most fickle number in the report as those are forward looking ( estimates) and can easily ramp up or back down depending on the change in conditions when it comes to feed prices and hog prices or both. Those distant months might get dragged higher by the overall bullish tone to the report especially considering that the beating they took this past week ahead of the report pretty much factored in a sizeable bit of expansion for that time frame.
Then again, with a big USDA grains report due out Monday morning, the impact from that report on corn and meal prices could become a factor in the intentions. Frankly, if hog prices stay very high this summer, and there is no reason for them not to at this point based off of this report, and if this season's expected grain and bean harvests are large, I expect the intentions number to continue moving higher - there is just too much profit potential for hog producers at such lofty levels for them to pass it up.
Let's see what we get Monday by the close to get a better sense of how the industry is treating the overall report.