Something’s Fishy In Hogs

Have you been watching the agricultural markets this summer? If you haven’t, you should be. Interest rates are boring. All they do is rally on good news, and rally on bad news. Trading the stock market ($SPY, $QQQ, $ES_F) is boring. It chops around. The action has been in ags.

The grains are wild ($ZC_F, $ZW_F, $ZS_F). Spreads are moving crazily. Markets are on edge because grain supplies are tight, and while they had an easy time getting the crop in, the weather hasn’t cooperated. It’s been dry in the corn/soybean belt and crops are stressed. Yesterday the news wasn’t good, and markets are higher overnight.

The grain market underpins virtually every other market. It’s also correlated to the oil market($CL_F) because of infernal ethanol subsidies.

Across the trading room, the cattle and hogs ($HE_F) have been busy. Hogs have been on an outright tear. There are a number of reasons for the big rally. At first, it was because a lot of the big traders were short July and June based on positioning for the Goldman Sachs($GS) roll. June exploded, and July followed. Short covering along with a bear market that turned into a bull.

Pork demand is surging. It always does a bit in the summer. Grilling season brings more demand. But there are other factors at work. The US is sending more pigs to China and Korea. That helps out farmers who are having to pay more to feed their herds.

However, there are some other interesting issues that are giving a bull tone to the market. First, the USDA Hog and Pig Report is out on June 28. The expectation is the report will be a little bullish. Second, Smithfield ($SFD) has their year end around the same time.

Do you think Smithfield has an economic incentive to increase the value of their inventory going into year end?

You bet they do. An increase in the value of assets always makes the books look better. It can temporarily hide some warts. Not only that, but Smithfield is going to buy back $250M in stock, always a sign of weakness in a company for me.

In the near term, it’s hard to see how the hogs are going to cool off. But, long term they might. A European slow down combined with a Chinese slow down, high grain prices, could put a lot of pressure on hog farmers.

In the meantime, if you are a financial trader, turn your eyes to the agricultural markets. In the summer, they get hot.

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