Time to beef up on hogs versus cattle?

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The lean hog market is approaching a well-defined seasonal bottom that usually occurs during the opening half of April, and a number of traders are gearing up to go long that commodity over the coming weeks.

They hope to be in position ahead of any upturn in values fuelled by a drop in fresh meat supplies and the start of the U.S. spring grilling season.

But this year many traders are looking to marry any long position in the hog market with a short stance in cattle, as multi-year high beef prices look set to crimp beef demand and further accentuate pork’s appeal.

Spring rally

April lean hog prices have lost more than 12 per cent since the beginning of the year on the back of increases in domestic production and stocks, as well as a slowdown in U.S. exports.

But traders are anticipating a turnaround within the next month as demand picks up once the spring grilling season gets underway and Americans increase their consumption of pork chops, hotdogs and other popular meat cuts.

So pronounced is this pickup in outdoor cooking during spring that lean hog prices tend to display one of the most well-defined seasonal rallies of all commodities around that time, with April lean hog futures having rallied during the first half of April in four of the past five years.

Furthermore, this year’s pickup in demand is expected to be especially strong given lingering cold weather across the country that has kept a majority of Americans locked indoors for longer than usual, adding to pent-up demand for sunshine and barbecues once the weather warms up.

Pricey beef

Steaks and burgers usually also feature heavily on U.S. home-cooked menus during the spring and summer, but they may suffer from a drop-off in demand this year as ground beef prices reach record levels and steak prices hit eight-year highs at the grocery store.

Pork chop prices, by comparison, are slightly lower versus year-ago levels — about equal to ground beef prices and just over half the price (per pound) of sirloin steak at the grocery store.

This means that cost-conscious shoppers planning any early-season grill-outs will likely be tempted to scale back on any beef purchases in favour of pork over the near to medium term. That should not only fuel upbeat sentiment in the hog market but also underscore any bearish rumblings in the cattle and beef markets.

Position potential

Traders are gearing up to exploit this potential simultaneous run-up in pork demand and decline in beef consumption by going long lean hogs and short live cattle.

They’re also drawn to this trade by the fact that the value of a one contract position in each market (long hogs and short live cattle) is at its lowest level in more than 10 years, and so has abundant potential upside room from current levels, and very little precedent for declining further at this point in the calendar year.

One potential negative for the hog market over the near to medium term is the relatively high level of pork inventories currently in cold storage facilities across the United States.

But those stocks look set to be chewed through quite quickly if the expected swell in pork product purchases takes place once spring weather sets in.

Furthermore, while speculative traders have been actively funnelling money out of the hogs’ arena in recent weeks, managed money traders are already sitting on their largest net short position in lean hog futures and options in close to a year and so are unlikely to ratchet up short exposure at this juncture, given the well-known tendency for hog values to rally over the coming weeks.

Indeed, speculative money flow is likely to pour back into the hog arena as those traders pile on to the seasonal bandwagon as well, further accentuating any upthrust in hog values over the opening half of April.

So while the recent bias of lean hog values has been to the downside, the approach of the U.S. grilling season is prompting a number of traders to brace for a turnaround in that market before long.

At the same time, with beef prices close to record highs, many traders are adding a short cattle component to that hog trade so as to benefit from any drop-off in beef purchases that may be seen just as pork demand picks up.

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