Looking to the Futures

Lean hog futures moved as high as $86.225/cwt on Tuesday. That represents the highest price for the February contract (/HEG26) since October 21st. A weakening dollar and lower herd numbers contributed to the strength.

The dollar index ($DXY) climbed from 98.507 on October 21st to a high 100.395 on November 21st. That is also the date that the February lean hogs contract reached its low over the past six months at $77.125. The dollar has fallen as other central banks have been more hawkish on inflation in recent months. While the Fed has reduced rates at the last three meetings, only the Bank of England followed suit in December, following three straight meetings without any changes, and the Bank of Japan actually raised rates by a quarter point. Other major central banks held rates unchanged at their last meetings of the year.

Alongside the weakening dollar, exports are up year-over-year. For the week ending December 12, sales totaled 23,800 MT, up 9,000 MT from last year. Exports reached 33,600 MT, up 2,000 MT. Sales for the next marketing year were down slightly, at 7,600 MT versus 7,900 MT last year. For the full year, exports totaled 1,600,900 MT, up 82,300 year over year. Domestic prices were lower by 0.7% in November versus the prior year, but up by 1.8% for the fourth quarter. For the full quarter, the USDA Livestock, Dairy, and Poultry Outlook expects production to total 7.2 billion pounds, down 0.3% from last year. The forecast points to lower farrowings and disease problems in certain pork-producing states as reasons for the decline.

Looking ahead, the Outlook forecasts higher production next year, particularly in the second half of the year. As a result, live hog prices are expected to carry on nearly unchanged for the first half of next year. The forecast for the second half of next year anticipates a 7.9% decline to $71/cwt, resulting in a full-year average of $67/cwt, down 2.7% from this year. The quarterly comparisons are particularly important for lean hog futures given the seasonality of pricing, with prices in summer averaging around 30% higher than in winter months. Lean hog futures prices tend to increase during the summer months due to both supply and demand factors. On the supply side, the biggest months for farrowing are June, July and August, with the pigs born during that season ready to be processed during the winter. Meanwhile, summer grilling season increases demand.

We will look at the February contract on a six-month chart, given the seasonality mentioned above. The sharp selloff from the high reached in September is apparent, as is the reversal from the low point reached in November. Given the prior strength, the high in September did not push the RSI into overbought territory, but the steep decline from there sent it below 30 into the oversold range. November’s low in choppy trading led to an inverted head-and-shoulders pattern and could indicate further upside potential. The 9-, 20- and 50-day SMAs are all below the contract price, with the 20-day crossing above the 50 on Monday.

9-Day SMA     84.475

20-Day SMA     82.545

50-Day SMA     82.00

14-Day RSI     66.115

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