Grain Report Expectations // Pork Analysis

June 8th, 2009 Posted in Uncategorized

First order of business ... We'll get the latest set of numbers from the USDA on Wednesday morning with the Monthly Crop Production release. Here are the numbers from May, along with the average guesstimate and trade ranges for the old and new crop ending stocks and winter wheat production forecasts (Courtesy Informa Economics):

http://marketinsight.tradehugger.com/files/610-usda-report4.jpg

Suffice to say, the only category that holds expectations of no decline is the '08/'09 Wheat ending stocks number. All other categories expect some degree of decline in supply.

Today's decidedly bearish close, in my opinion, in the wheat markets bodes for some further selling in the overnight session. I imagine that tomorrow will become reflective of some further "squaring up" before Wednesday's release.

Let's talk about the pork market. Nearby lean hog futures are getting killed. Producers, by some estimates, are losing $18.00/head.  And this is an improvement from earlier in the year. The price of inputs has shot to the upside, and the prices for hogs has fallen.  This is the perfect storm for catastrophe for a pork producer. Those that have the ability to weather this storm will be on some surely solid ground. The expectations for a time frame when recovery may be possible is in the ballpark of Q1 '10. That is just a guess at this point.

I have witnessed some rather significant declines in the 15 years I have been watching and trading these markets. Between the summer of 1997 and winter of 1998, lean hog futures broke from 85 cents/lb. clear down to 22.50 cents. Between summer 2001 and summer 2002, lean hogs broke from 75 cents down to about 30 cents. For the past five years we've seen relative stability as the market has traded in a range of about 55 cents to about 80 cents.

Nothing cures low prices like low prices, and eventually this industry will get through this period of seeming excess capacity respective of the present economic environment. H1N1 shall pass, too, at some point.

Being that we are down toward the low end of the trading range, it is going to be interesting to see if there is a washout to the downside. If so, this could set up a very nice long-term trade.  LHN9 settled at 59.50 today, and LHQ9 settled at 61.52.

I wanted to set the table as to this scenario that is unfolding. I will be back again with more comments as time goes on.

Bob