July 22, 2009
CME hogs plunge on production worries, pork sales jitters
Chicago Mercantile Exchange hogs fell sharply on fears that the recent reduction in slaughters to bolster pork packer profit margins might backfire and create a backlog of hogs that could undermine the recent surge in wholesale pork demand, according to analysts and traders.
Last week's hog slaughter was down 8.7 percent versus a year ago, which some industry watchers contend was in part responsible for a 12.8 percent rise in the US Department of Agriculture's pork cutout price during that period. The government's pork cutout value is a composite of meat cuts at the wholesale level.
USDA's Monday evening pork cutout value slipped $0.17 per hundredweight. But, it was enough to raise fears that wholesale fresh pork buyers might balk at paying for product at current prices.
"Lower kills pumped up the cutout, but those hogs have to come to market soon," a brokerage firm's hog trader said. "They (hogs) didn't just dry up and blow away."
Bullish CME traders were already nervous before Tuesday's outcry session because of August and October bearish premiums to the exchange's hog index. Both contracts were also overbought based on technical indicators.
Floor participants took their cue from Globex-CME hogs that broke hard in overnight trading. The subsequent sell-off in the hog pit attracted the attention of funds who sold after August and October surrendered key technical support territory.
Word that maintenance issues at Seaboard Foods' pork processing plant in Guymon, Okla. on Monday heightened worries Tuesday about a possible looming hog glut. The facility, however, is expected to make up Monday's downtime by slaughtering Saturday.
Dan Norcini, an independent livestock trader, said Tuesday's lean hog meltdown reflects a lack of potential buyers in the hog pit after the pork cutout's upward momentum stalled Monday.
Also hedge funds, said Norcini, still remain massively short the hog market, which accelerated the sell-off that in one-day's time nearly erased all of last week's gains.
"With the August contract carrying a good premium to the index that is not moving higher because of packer influence on the cash market, hedge funds felt emboldened to pile on more shorts," said Norcini.
