Hog futures have fallen approximately 30% between last November and the recent March lows near $.72 per/lb. This rapid and significant decline may be nearing an end as the commercial long hedgers come out buying with both hands because the market is approaching what they clearly feel is an important price level.
The recent sell off in the futures market and corresponding build in the long hedgers' commercial trader position as reported in the Commodity Futures Commission's weekly Commitment of Traders report began in earnest once the hog futures fell through $.93 per/lb which had been the low for 2014. The $.20 decline in the futures market since then has brought them out to lock in future hog supplies at the greatest pace in nearly three years.
Looking at the chart shows why it is so important to pay attention to the commercial traders...especially at their extremes. The premise we follow is that no one knows more about a market's value than the people whose livelihoods are dictated by the proper assessment their market. Importantly, we're not relying an any individual trader's opinion or actions but rather the collective actions of the commercial trader group as a whole. This helps filter out regional differences as well the gap between market rhetoric and market action. Over the last five years the market has traded down towards $.65-$.75 per/lb four times. Each of these times, commercial traders bought heavily and proved to be profitable a short time later.
We are currently facing a similar pattern. Commercial traders have purchased more than 75,000 contracts since November's highs. Their current position is net long about 20,000 contracts. This is a little more than 20% of the total open interest in the lean hog futures. Commercial traders have fantastic knack for being the dominant player in this market at its swing highs and lows. Again, reference the chart to see their actions at the market's peaks and valleys.
We think their is a good possibility that June lean hog futures will form a bottom worth swing trading within the next week. We're confining this to a short term opportunity in the June contract due to the early summer weakness that is typical of the hog market. The long-term view is that the $.65-$70 level may be breached during the early summer weakness and provide a long-term buying opportunity at better prices going forward.
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