May 21, 2004

 

 

US Pork Belly Stocks Extremely Bullish For Futures

 

Pork belly futures at the Chicago Mercantile Exchange on Friday may have an extremely bullish reaction to the government's 46.109-million-pound end-of-April storage figure released Thursday afternoon that came in on the low end of projections.

 

The average of analysts' pre-report projections was 49.1 million pounds, derived from a range of 46.0 million to 50.869 million pounds. This compared with an end-April year-ago figure of 48.5 million pounds and the end-March figure of 51.7 million pounds.

 

The five-year belly average for end-April stocks is 65.7 million pounds, and the 10-year average is 64.9 million pounds.

 

Analysts predicted 50- to as much as 300-point higher belly futures on Friday based on the storage report. However, some market watchers thought a portion of that bullishness might have been factored into CME bellies' sharp rise before the close on Thursday that was in part because of speculation of possible bullish storage results.

 

Chuck Levitt, senior livestock analyst with Alaron Trading Corp., offered a 200- to 300-point-higher call for belly futures on Friday based on what was the largest-ever month-over-month withdrawal for April, at 4.0 million pounds. Prior to this, the 1.6 million taken out in April 2001 had been the largest. Most of what was moved out of storage was from non-reported warehouses while visible supplies declined by less than 1.0 million pounds, he said.

 

"What makes the April drawdown more impressive was that the government downwardly revised the March 31 figure by 1.5 million (pounds)," said Levitt.

 

Dan Vaught, analyst with A.G. Edwards & Sons, believed a 100-point belly bounce is possible with the belly stocks' outcome evidence of extremely strong demand for bacon that was also reflected in the total pork outcome despite large slaughters during the period.

 

Travis Benson, analyst with Crystal River Capital, anticipated belly futures to climb 50 to 100 points and owed the low belly inventories on high fresh prices that might have encouraged use of frozen stocks to keep pace with phenomenal demand.

 

End-April ham stocks came in at 56.364 million pounds, compared with a 50.0 million to 56.7-million-pound forecast and March's 51.8 million-pound outcome. Ham inventories a year ago in April were 91.7 million pounds. The five-year end-April average for hams is 90.9 million pounds.

 

Vaught said the ham result was within expectations but on the high end of forecasts because of Easter's mid-April arrival. However, a potentially larger increase in ham stocks may have been avoided because of international buying, he said.

 

April's total frozen pork inventory was reported at 451.548 million pounds, versus estimates of 454.1 million to 460 million pounds. This compares with the end-March total pork inventory of 453.8 million pounds and a year-ago end-April figure of 520.0 million. Pork stock's five-year April average was 529.9 million.

 

Levitt said mushrooming export demand, April's belly drawdown and domestic retail and fast-food usage were partly responsible for the total pork figure.

 

Vaught said that whatever increase that would have occurred with respect to April's pork stocks may be linked to the ham results. However, hog future traders may not be disenchanted with the outcome.

 

"I would not be surprised to see nearby hogs open 25 points higher because of the data and CME's cash index reported above $83.00 per hundredweight," said Vaught.

 

USDA reported total end-April beef stocks at 421.855 million pounds, compared with 416.772 million pounds at the end of March and 389.653 million a year ago for April.

 

Pre-survey forecasts were not provided.

 

However, Crystal River's Benson was disappointed that the report revealed a month-over-month increase rather than a drawdown ahead of Friday's cattle-on-feed report that could suggest lower cattle-on-feed numbers than a year ago.

 

Vaught said beef stocks showing an increase on the heels of strong cattle prices in late April would "prove disappointing to a lot of folks." However, slaughter rates rose during the second half of April, and it is possible that the market was unable to absorb the increased production at higher prices.

 

While a few traders may trade with the report in mind on the open, it's likely that most people will concentrate more on cash and wholesale values with an eye on the cattle-on-feed survey, Vaught added.