Big Day in The Lean Hogs

Posted by Jeff Carter
on March 25th, 2011

If you are a financial trader, you understand how big a day unemployment is. Commodity traders beat to a different drummer. Unemployment rarely affects them. Each commodity has it’s own D-day. The Hogs and Pigs Report is that day for the hog market. It comes out after the close of pit trading, but the GLOBEX session will still be open. UPDATE The Globex session will not be open. The open will happen Monday morning at 9:05 CT, and the fun will start then. The Hog and Pig report is always on a Friday afternoon.

Before there was GLOBEX, I dabbled in the hogs($HE_F). In 1996 I had a small outright position long. I didn’t even know about the report, and was playing golf with a neighbor on Saturday. He worked for the $CME and was in the marketing department, his specialty was hogs. We were teeing off on the fifth hole and he mentioned the report came out really bearish. I didn’t think much of it, but told him I was long. He laughed and said, look out. On Monday, Hogs opened up lock limit down. A few traded and I was able to get out, but it went limit down the next day too! I didn’t forget about Hogs and Pigs ever again.

The other thing that used to happen was on the day of the report, there were wild swings in the market as people liquidated or put positions on. That doesn’t happen as much today, although I suspect the market will be thinly traded all day. The electronic market has made hogs extremely tough to trade. Yes, the HFT guys are in there. Typically though, before electronic trading, the hog market was volatile, but you could get some volume off at a price. HFT trading makes markets a lot more thinner as less bid/ask is at each price. There won’t be an exception today, and there could be some crazy moves if an HFT program gets caught.

The expectation for this report is that the near term quantity of hogs is steady. But, farrowings will be down. The farmers are reducing the size of their herds. Expectation of higher grain and fuel prices will cause them to do that. If the market responds correctly, the deferred months will rally and the near term months will hold steady or even break a little. But, you never know.

Demand in the hog market has been really strong over the past couple of years. There is no reason for that to change now. Asia is a big importer of American meat, and they have had continual problems with hoof and mouth disease in different countries. They also have had problems with bird flu.

If the near term hog market breaks, you might want to look at buying a couple.

UPDATE

Market opened, and June is leading the way up. The other day in a vid, we talked about doing a spread; sell June, buy July, and that is NOT working. Instead of working 45 points in our favor, it’s 45 cents in our face!

The market action looks like a short covering rally ahead of the number, the big boys are taking advantage of it and buying deferred months, and selling into the strength of June. It will be an interesting trade Monday.

UPDATE 2
Report came out. The herd is 1% greater than last year, but down 1% since December. Farrowings are down 3%. Additionally, the amount of sows in the field are down. Weights are up near term, and there are less hogs out in the distance that will be ready for market. The amount of pigs per litter is down as well.

The report is neutral.

Answer from the experts, buy deferred months. If you have to go short, sell June and July. However, if you put that trade on today, you got an ass whipping. $660 per contract if you did the October vs Jun. $290 per contract if you did the same spread against the July.

The market is extremely thin and choppy. It’s not for the faint of heart.

On another note, an anecdote. The cotton market has been absolutely nuts this year. One trader I know of that is one of the top cotton traders in terms of volume has decided to quit trading the futures market at the ICE. ($ICE) Too whippy and too crazy due to all the algo’s in it. As I have said before, small markets sometimes don’t lend themselves well to the same technology as big markets. Cotton is one of those.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.