CME: Lean Hogs Futures Keeping Pace with Cash Hog Market

US - To say it has been a wild ride in the Lean Hogs futures markets this week would be just a bit of an understatement, don’t you think? Wednesday’s limit down—limit up day made us feel we were caught in a time warp and had been transported back to a long-lost frozen pork bellies futures pit! Though not unusual for bellies, we cannot remember such a day for either live hogs or lean hogs. One may have occurred but we can’t recall it, write Steve Meyer and Len Steiner.
calendar icon 15 April 2014
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The June futures charts below demonstrate the volatility that has characterized the Lean Hogs market since early March. The meteoric run-up in prices since early March is clear but notice also that June LH had increased from $101 on January 3 to $112.225 on 28 February — an increase of over 11%. And the rate of increase was already growing before the dramatic gains of March. Note also the relative vertical sizes of the bars before and after about 1 March. Not only has this market been on a dramatic increase but the volatility of pricing within daily sessions has been roughly three times as large since 1 March as it was from 1 January to the end of February.

The monthly LH chart demonstrates the same increase in volatility. Note that a few large ranges in weekly prices can be seen in the past (July 2012 and July 2013, for instance) but all of those involved changes in the spot contract month. NOT SO for this spring. The entire run-up in the weekly LH chart has been recorded by the April LH contract which goes off the board on Monday.

A lot of discussion in hog market circles has centered on whether markets “should” have behaved in this manner. We aren’t sure that is a profitable discussion in the long run because markets do what markets do. Further, markets are reflections of information and we know that the information available about the hog supply situation has been incomplete. The dearth of information has lead to a wide array of opinions and decisions.

But there is one fact that we should remember: CASH markets for pork and pigs have exploded. We highlight this fact simply because, as the old adage goes, cash is king. While futures markets are impacted by models and perceptions and beliefs and opinions, cash markets are established by real buyers and sellers of actual products. Merchants who have paid record prices for wholesale pork in recent weeks did so from a front row seat to their marketplace. That may have been a scary vantage point this year but it is front-row nonetheless. Should they have chased product as they have? We won’t know that until we actually see summer supplies.

Lean Hogs futures have merely kept pace with the cash hog market as cash hogs have kept up with the product market — just as all are supposed to do. “Should” April hogs be $5 over June? Not in normal circumstances but It is quite possible that pricing April hogs and pork higher than June is necessary to reduce usage (not demand!) in April and leave more product for future usage. It’s unusual to see time rationing in hog markets but this situation is anything but usual.

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