"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, March 29, 2014

USDA March 2014 Quarterly Hogs and Pigs Report

As some of you know who have read this blog for some time now, my area of expertise in the commodity markets is particularly in the livestock markets, where I cut my teeth as a trader many, many years ago and where I still tend to concentrate my time and energy.

That being said, I wanted to give you a perfect illustration of how our government agencies that distribute data to the marketplace can be consistently wrong and rarely if ever are taken to task for so doing.

Some of you are aware of a virulent disease has been affecting the US hog herd. It is called Porcine Epidemic Diarrhea or PED for short. This virus has a mortality rate somewhere north of 90% on young piglets. Adult pigs can contract the disease, which by the way does not impact the meat in any way or render it unfit for human consumption, but they generally can be treated and recover. The baby piglets however are usually lost however due to fluid loss from severe dehydration and other associated effects of the virus.

Hog and pork prices have been soaring this year as the disease has devastated the herd here in the US. Heading into this report on Friday  (yesterday) estimates of losses due to the virus were ranging on average of up to 6%. Other private firms had forecasted losses upwards of 10% with some running as high as 30%.

Here is where things get interesting. The March report from USDA yesterday showed losses no where near the average of analyst estimates. As a matter of fact, the report showed the impact from the disease was not nearly as widespread as most in the industry expected.

The problem is that all of the recent hard data that we have been getting completely contradicts the USDA numbers from yesterday.

At the risk of boring the reader with the data breakdown ( I am hopeful that some of my readers are hog producers however ) here is what the pencil pushers at the USDA gave us when it comes to the various weight categories.

Market hogs under 50 pounds  96%
50 - 119 pounds                     97%
120 - 179 pounds                   97%
180 pounds and over               95%

A quick guide to interpreting this: this is the percentage of hogs compared to the previous year at the same time. In other words, the number of 50 pound and under pigs is 4% lower than last year at the same time.

Hogs are generally slaughtered when their weight reaches near 270 - 275 pounds ( this will vary considerably but is a good average ). Since it takes time for hogs to grow to this weight, one can generally gauge the available supply of market ready hogs that will be coming in any one period by looking at the weight numbers and calculating the time for the hogs in that bracket to reach maturity.

Now, let's take a closer look at this and see where things go awry with the USDA.

Many of the readers here are precious metals guys and could care less about pigs or cattle or corn or beans, etc. But laying that aside for the moment, if you look at these numbers not knowing anything else, what would you say that the MAXIMUM REDUCTION in the number of slaughter ready hogs is going to be over the next few months according to the USDA? Answer - 5%. If you said this, go to the head of the class. There will be a period during which one could look for the reduction in the number of slaughter ready hogs to be down nearly 3% from last year and another period in which it will down nearly 4%. But the maximum reduction that the market can expect, based on USDA's numbers is 5%.

Here is where the problem begins... this same USDA also issues, every single week, week in and week out, the total number of hogs that are under inspection by USDA inspectors. The report is usually dated two weeks behind us but it is the industry standard for keeping track of the number of cattle and hogs killed for meat production here in the US. It is based off of hard, on-the-ground data

For the first two weeks of March alone, guess where hog slaughter numbers are running in comparison to last year... The first week they were down 5.75%. The second week they were down 7.77% and estimates over the third and fourth week continue to run near 7%! In other words, we are already EXCEEDING the maximum reduction in hog slaughter numbers that USDA just told us to expect in their report this Friday.

What accounts for this glaring difference? Answer - The Quarterly Hogs and Pigs Report is based off a census taken by USDA of various hog producers. It is essentially a snap shot of the industry. USDA contacts various hog producers, both large and small, and surveys them to get their intentions, numbers, etc. and then uses that data to put together the quarterly report. This is crucial - they do not survey every single hog producer out there although they do the best that they can with the manpower that they have. It is a snapshot but it is an incomplete snapshot.

On the other hand, the weekly slaughter data is tabulated from real live data every single week. We know exactly how many hogs were killed on a single given day based off of those reports. There is no extrapolating - it is actual data.

In effect, what we have is a contrast between facts and estimates drawn from incomplete data.

If that were not bad enough, this is the very same USDA that a mere 3 months ago, in their December Quarterly Hogs and Pigs Report gave us the following weight breakdowns:

Market Hogs under 50 pounds      99%
50 - 119 pounds                        100%
120 - 179 pounds                       100%
180 pounds and over                  100%

That report essentially told the market that any sort of impact from the PED virus was going to be minimal. Take a look at the following continuous hog chart and tell me, that USDA was anywhere near to being close as to impact from the disease!

Herein lies the crux of the problem. Hog producers and other commercial interests who need to institute risk management programs to secure profits and mitigate price risk depend on the accuracy of the data being furnished to them by these various government agencies, in our case here, USDA. Any hog producer who three months ago, used the data given them out of the USDA December Hogs and Pigs report to begin implementing hedges for their expected hog production and put on those short positions has been absolutely obliterated as a result. They have forfeited a large profit ( a once in a lifetime profit I might add ) that could have been theirs had the data actually reflected what the true reality of the impact of the disease was going to be. Not only that, they have been met with large margin calls. Failure to meet those necessitated them having to close out the hedge incurring a large paper loss in the process. All this because the data that came out of the USDA was inaccurate. Please note that I am being kind here by employing the word, "inaccurate". What comes to mind is more akin to horse excrement.

So here we are, some three months later than the last USDA report, and that agency has had to come back and issue another revision to try to bring their previous data more into line with the reality of what has occurred on the ground. Never mind the fact that many producers have been seriously harmed financially as a result. Yet for some bizarre reason, this same USDA, issuing another Hogs and Pigs report, with data that is already at odds with other data from within that same agency, is lent credibility by the various analysts and such in the industry. My question is "WHY?"

Had the agency actually picked up something, anything, of the impact that this disease was going to have three months ago, an impact that many of us said was indeed going to be the case, then, and only then, would I lend it some credibility. But for an agency to miss the mark by such a large extent three months ago, to now come out with yet another report, that is at such great odds with the majority of estimates from many other seasoned and experienced traders and analysts, is further proof that the data coming out of it is next to useless.

Some will argue that it is what it is and that the data is what we have to go by until shown otherwise, but that is missing the point entirely. The point being that it is easy for USDA to come back AFTER THE FACT and issue their revisions but that does no good to those who have made marketing or risk management decisions based off of data that has a notorious track record of being so far off of the mark.

One last thing, here is a chart, courtesy of the fine folks over at Urner Barry (drawn from the American Association of Swine Veterinarians ), of the number of reported and diagnosed incidents of the PEV virus. As you can clearly see, the number has increased sharply since the fall of last year. It was in late September/early October that we began to see the incidents of new cases really pick up -  Impact from the disease will not be seen until about 6 months later. Look at the huge spike in cases in late January which continued to increase until it seems to have topped out in late February. The case number TRIPLED from the September/October levels.

Again I ask you reader, without knowing much if anything about the livestock markets, if the impact from the disease is not generally felt until about 6 months later, during what time frame would you expect to see the greatest impact on the number of slaughter ready hogs this year? Answer - in the late June - August time frame. However, if we base our view on the data that the USDA just gave us this past Friday, the worst impact from the disease is already behind us...

The reason given is that USDA suggested that more hog producers farrowed their sows during the December 2013 - February 2014 period than the market expected ( + 3%). That may be true, but even if it is, and I have my own reasons for doubting this, it still does not deal with the rapid spike in the number of cases breaking out during the depth of winter ( Tripled the case during the fall) nor does it explain how slaughter can currently be down by 7% already when USDA tells us that 5% is the absolute maximum reduction we can expect.

I suspect that the USDA is going to be once again, way off base with their numbers and that by the time the next Quarterly Hogs and Pigs report is released at the end of June, they will once again be revising their numbers.

We'll come back and revisit this at the end of June - of that you can be sure.

Quod est demonstratum.

Weekend Gold Analysis

To begin these comments, let's take a look at the hedge fund positioning in the Comex gold futures through Tuesday of this past week. April gold closed at $1311.40 that day having closed at $1359 a week earlier ( Tuesday, March 18). That is a loss of $48 over the reporting period that the CFTC employs.

In looking at the chart ( a comparison of the hedge fund NET positions against the price of the metal ) you can see what happened. A combination of LONG LIQUIDATION and NEW SHORTING produced a drop of some 18,000 contracts ( futures and options combined ) in the overall net long positioning of the group of traders. The Blue Line is the hedge fund net position while the red line is the gold price.

The result? - Gold moved lower as this group of large traders was selling. Through the end of the week, gold dropped another $17 to settle at $1294 in the April contract, which by the way goes into its delivery period next week.

Here is the Daily or short-term chart.

There are several things to note. First, Bears are back in control of this market on this time frame. Negative Directional Movement is above Positive Directional Movement and the ADX has turned lower and is continuing to move down indicating the break in the uptrend. The recent uptrend that began in January has halted with the market having given up over $100 off its best level of this year.

Second - the "golden cross" which some were touting as sign of a new bull market beginning has been negated as price has fallen below that level of the cross ( the 50 day moving average crossed up and above the 200 day moving average from beneath).

Third - the sloping uptrend line drawn off the late December low has been violated to the downside.

These are all bearish signals.

The one bullish signal on this chart is that the important 50% Fibonacci retracement level of the entire rally from that same December low near $1180 to the recent high near $1392 has thus far held. That level is near $1287. Bulls managed to keep price from penetrating that level for long before it recovered.

On the short term chart, the bears have the clear advantage.

Let's shift to the weekly or intermediate chart. I have included another old, but reliable technical indicator, the Stochastics, because of the nature of the price action on this time frame.

Let's first look at the Directional Movement Indicator. Notice that the ADX line ( the dark line ) continues to move lower indicating a TRENDLESS MARKET. If a market is trendless, that means it is moving sideways. That is exactly what gold has been doing on this time frame. It is essentially meandering back and forth in a very broad range as noted in that green rectangle I have shown. Support down near $1200 and below is intact while resistance near $1400 is also intact. We have what amounts to a $200 range within which gold is working.

What one usually experiences with a market moving within a broad trading range is the perma bulls begin coming out with their "to the moon" price predictions and all manner of wildly bullish scenarios as price works its way up towards the top of the range.

The perma bears on the other hand, begin talking their "price is going to collapse" scenario as the price works it way down towards the bottom of the range.

In other words, the bulls get noisier as price moves higher while the bears get noisier as the price moves lower.

The Directional Movement lines indicate that while the bulls have seized control of the market  ( +DMI (blue line) crossed above the -DMI ( red line), they are in danger of surrendering their mild advantage if they do not quickly assert themselves.

I have also noted the Stochastics indicator because this is designed for trendless markets. Note the area within the rectangle on the price chart and look at the action of the stochastic indicator. It has been moving higher generating buy signals as price has bounced off of support at the bottom of the range and generating sell signals as price has stalled out at the top of the range. It is currently in a sell mode .

Lastly here is the monthly or long term chart.

The Directional Movement Indicator shows that the market is moving sideways as well with no clear trend although bears currently have a slight advantage in that -DMI remains above +DMI. Those lines are converging however so the bears will need to reassert themselves sooner rather than later if they are to retain control on this long term frame.

Also, the MACD indicator, while still in a bearish mode, is working on putting together an upside bullish crossover which would generate a buy signal based on that indicator.

Lastly, the sloping uptrend line drawn in red has thus far held. One can see that the $1280 level is a pivot with price working around it on both sides.

The chart is inconclusive at this point. The long term uptrend is still intact near the 38.2% Fibonacci retracement level although both indicators show bearish forces still in control. Bulls are attempting to wrest control of the market from them but have not as of yet managed to do so. A push through this week's high near $1400 will be required to tip the scales in their favor in my opinion. Before that can occur however, $1300 will have to be captured.

We'll see how the battle goes.