Trading | June 11, 2021

Looking to the Futures

Hog Futures Ride Inflation Wave Higher

Key Points

  • Returning Demand and Tight Supplies Move Pork Prices

Hints of inflation have been rumored for months now and Thursday’s Consumer Price Index data from the Bureau of Labor Statistics delivered another reminder that prices are moving higher. Whether the wave of higher prices is transitory or not, May’s CPI was up 5% year-over-year, above analyst’s estimates. Most agricultural commodities are higher this year, but none have increased more than pork prices. Lean hog futures have been on a tear, increasing over 74% year-to-date.  

Hog prices have been on the increase this year as strong demand has been met with tight supplies. The June lean hog contract, which expires Monday, hit a contract high Thursday above 122.00, marking the best level for a front contract since July 2014. Some profit-taking and related technical selling has tempered the market this week.

About a year ago, hog futures were in their sharpest free fall ever as demand from restaurants vanished and pork prices plummeted.

The most active lean hog futures contract, August 2021, is also on the move and traded just below 120.00 recently. Hog prices have rallied this year due to recovering domestic demand and strong exports to the world’s number one consumer China. Ongoing Chinese demand could be brought into question however, and this unknown variable may have dampened the rally to some degree over the past week.

Forecasts for extreme heat across the U.S corn belt, a variable that could negatively impact carcass weights, may be supporting prices to some degree.

The current supply-demand setup has vaulted cash hog prices higher, but longer-dated futures contracts are trading at much lower levels. This condition, known as backwardation, is observable below as current futures prices for longer-dated contracts are observed.  

The quarterly Hogs and Pigs report from the USDA will come out June 24th at 3:00 PM. Expected disclosures from this update include the U.S. pig crop for 16 major states and the U.S., along with inventory numbers by class, weight group, farrowings, and farrowing intentions. The report provides accounting for nearly 95 percent of the total U.S. inventory. 

Updated CFTC data as of June 1 showed continued increases in bullish lean hog futures positions held by money managers at 82,632 net long contracts. This is a relatively high data point, only surpassed a few times in 2017 and in 2013. The weekly update has been on the increase for the last four consecutive reports.

Total lean hog futures volume in May was 1.04 million contracts, up about 4.9% from the same month last year and 20% higher than April 2021. 

Lean Hog Options and Implied Volatility                  

Options on lean hog futures traded 211,598 contracts in May, a 33% increase over April. Implied volatility for short-dated near-the-money options is observed near 30.

Technicals August Lean Hog Futures LHQ21

With August lean hog futures trading above all moving averages, technicians may see the 10-day RSI of 79 hinting at an overbought condition. Hightower observed a short-term positive trend with the close above the 9-day moving average and the swing pivot number. Resistance is seen at and 120.35 and then 122.05 while support levels come in at 116.80 and 114.92.  

Resistance 2    122.05

Resistance 1     120.35

Pivot                  118.47   

Support 1          116.80

Support 2         114.92

SMA 9 Day       117.26

SMA 20 Day    112.71

SMA 50 Day    106.83

SMA 200 Day  90.04

RSI 14 Day       .79

Contract Specifications

The lean hog futures contract, quoted in U.S. cents per pound, controls 40,000 pounds of pork and trades from 9:30am-2:05pm ET. The cash-settled contracts require initial margin of $2,376 and controls about $47,400 worth of pork, providing a leverage ratio of roughly 20:1. For more information about lean hog futures, call Schwab Futures at 877-280-6040.

Trading Calendar

Lean Hog Futures Options Expire  06/14/2021

USDA Hogs and Pigs Report            06/24/2021 3:00 p.m. ET