Special Report; Trading June Lean Hogs

Name: Dennis Smith Company: Archer Financial Services

Years Trading: 21

The pork supply/demand table has improved dramatically over the past eight to twelve months. Currently, pork production for 2010 is projected to be down 2% from 2009 while exports are forecast to rise 8% compared to actual exports last year. One year ago the hogs were suffering from recessionary demand woes and extra production due to herd liquidation. Roughly 5% of the U.S. hog breeding stock has been liquidated over the last couple of years.

The hog market was gaining traction last spring when the H1N1 virus scare rippled through the market place. The reaction was a sharp drop in ham export business with Mexico, resulting in another spiral down in hog prices. Fortunately, the world has survived the H1N1 pandemic and pork export shipments and domestic consumption have recovered impressively. Business with Mexico has never been better. It appears that domestic pork consumption has been good and in fact improving. However, after a torrid pace during the November through January period, it appears that pork demand has peaked, at least for the moment. I can identify three principle factors contributing to the recent slowdown in pork demand. First, it's very likely that wholesale ham, belly and loin prices became too expensive and choked off demand. As prices for these primal cuts ease back down, this demand will come back to the market. Second, Russia, the U.S.'s fifth largest pork customer, has recently pulled out of our pork market. They have cited health concerns as the primary reason for delisting U.S. pork plants from shipping product to Russia. More likely, they're attempting to support Russian pork prices in an effort to encourage Russian producers to expand production facilities. Russia has been very open with their goal of being self sufficient in pork production over the next few years. Finally, third, Russia has recently cut off all U.S. poultry imports, again, citing health concerns. I won't speculate as to their reasons for doing this, however, Russia is the U.S.'s largest importer of broilers.  As chicken prices begin to weaken in the states, this will prove to be tough competition with pork for the U.S. consumer retail dollar.

WHAT ABOUT LONGTERM PORK DEMAND?
Longer term, the U.S. will be in a strong position to export huge amounts of pork to the world market. Other exporting countries have whittled back production substantially; first in response to sky high corn prices and second in response to the recession and the negative impacts on meat consumption. Canada and the European Union represent the largest pork exporting counties that have curtailed their production substantially. As global demand for meats begins to recover, the U.S. pork producer will be in a position to move increasingly large amounts of product overseas. It's my opinion that what we currently consider to be high prices for meat products will pale in comparison to prices we'll experience "down the road". Global production of meat is down and will likely soon be facing a rising demand curve. Given the hardships in the pork industry, both in the U.S. and in other producing countries, expansion won't begin until a substantial profit incentive is offered. U.S. hog producers have lost money for the last two years and likely won't experience any profitability until the second or third quarter of 2010.

WHERE ARE JUNE LEAN HOG FUTURES HEADED?
The June hog contract recently topped at 8150 and corrected down to 7425 on the first leg down. The contract has recovered nearly half of its losses (recent high at 7825) before encountering large hedge type selling interest. I anticipate a test of the recent lows and likely a further downward correction before the uptrend is ready to resume. Major retracement levels can be measured at 7250 and again at 7020. I'm preparing to establish long positions on either side of 7250 basis the June hog contract. I don't want to see this contract close below 7000. Timing wise, I'm expecting the downward correction to be complete between the end of February and the end of March. Eventually, a test of the 8150 high is likely in the June hog contract. Looking at the big picture, down the road, I can visualize the hogs testing the all time highs of 9000.

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