Today's Idea

With a bullish seasonal bias and small futures to cash premium, Hog bulls seem to have a slight edge going into the spring. Some traders who are looking to take a moderately bullish position in Hog futures may perhaps wish to explore buying a call ratio spread in Lean Hog futures options. For example, with April Hogs trading at 88.925 as of this writing, the April 90 calls could be bought and 2 April 95 calls sold for a net debit of 0.900, or $360 per spread, not including commissions. The risk on the trade of the premium paid would occur in the above example at any price below 90.900. Profitability would occur if April Hogs settle above 90.900 and below 99.100, with greatest profit potential on the trade occurring at option expiration should the April futures be trading at the short option strike price (in this case 95.00). The biggest risks involve a price move above 99.100, where the extra option sold becomes "naked" leaving significant upside risk.

Fundamentals

Choppy price action has been the norm in Lean Hog futures lately, as bullish seasonal tendencies conflict with lackluster pork prices. Market ready Hog supplies are below last year's totals, which normally would be supportive for pork prices. However, the usual seasonal pick-up in demand has not yet materialized, which is keeping the futures price premium to cash prices rather narrow. Probably the biggest effect on Hog prices in the coming weeks will be the level of exports, which are a major component in the total demand for pork products. Large speculators continue to favor the bull side of the Hog market, with the most recent Commitment of Traders report showing non-commercial traders holding a net long position of 31,455 contracts as of January 31st. Commercial and small speculators are on the other side of the trade, but commercials continue to sell into the market, which may be keeping the front month futures price premium in check.

Technical Notes

Looking at the daily chart for April Lean Hogs, we notice that the attempt to move prices above the all-important 200-day moving average last week was short-lived, as hedge selling above 90.000 capped the bullish run. Volume has waned this week as prices moved lower, leaving some hope for bulls that the sell-off will not last. The market seems content with prices currently holding between the 20 and 200-day moving averages for now, at least until fresh fundamental news reaches the market. The 14-day RSI is neutral, with a current reading of 52.75. Near-term support for April Hogs is seen at the 20-day moving average, which is currently near the 88.150 area, with resistance seen at the recent high of 90.775 made back on February 2nd.


Mike Zarembski, Senior Commodity Analyst

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