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Looking to the Futures - March 19, 2019

Commodity Bulls in Hog Heaven as Futures Prices Rally

Fundamentals:

The spread of African swine fever throughout much of China has finally generated market reaction in the U.S. futures markets with the front month April Lean Hog futures having rallied nearly $15 per hundredweight since March 8.  

Recent data from China’s agricultural ministry has the nation’s Hog breeding herd down over 19% year over year in February. Total Hog inventories in the world’s largest Hog producing nation are down just over 16.5% from year ago levels.

The reduction in Chinese Hog supplies has caused domestic prices to surge which will force China to greatly increase its pork imports this year.

You know the situation is becoming serious as China has recently made its largest purchase of U.S. pork in nearly 2 years despite large tariffs being in place on U.S. Pork due to the ongoing trade dispute between the U.S. and China. 

Lean Hog Futures prices were actually in a bear market slump until the beginning of March, as trend-following commodity funds were steadily adding to net-short positions as prices fell. However, the bearish trend has reversed quickly as heavy short covering buying emerged and prices are now approaching the highs seen back in December above 70.00 for the April futures.

While the further extent of Chinese pork purchases remains uncertain, with no known cure for the Hog virus and a potential vaccine not expected anytime soon, we may expect to see China continuing its pork purchases in the coming months which is likely to keep a bullish bias towards deferred month Lean Hog futures prices at least in the near term.

Technicals:

Looking at the daily chart for the April 2019 Lean Hog futures (LHJ19) we notice the market moving parabolic after recent chart resistance at 58.600 was taken out to the upside.

Trading volume also increased sharply as the market rallied, which appears to be a combination of short-covering by trend-following systems traders and new-long positions being established by speculators.

Given the steepness in the upward price movement, it should be no surprise that the 14-day RSI has moved well into overbought territory with current readings hovering near the 76.00 level.

The next major resistance level for the April contract is seen at the November 20 highs of 73.425.

Support is seen at the 200-day moving average, which is currently near the 65.600 price level. 

 

Contract Specs: April 2019 Lean Hog futures (LHJ19)

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