Hogs Close with Weakness on Friday

Lean hog futures declined on Friday, with June contracts down $2.025 for the week, while the CME Lean Hog Index rose to $92.75 on May 21. Pork in cold storage at the end of April hit a 20-year low, down 8.71% year-over-year, despite a monthly increase, and spec net longs increased significantly to 91,744 contracts; the pork cutout value saw a slight increase, driven by gains in the butt primal, amid a decrease in weekly hog slaughter compared to the previous week but an increase year-over-year.

Analysis

Lean hog futures concluded the week on a weaker note, with contracts declining 40 to 75 cents on Friday and the June contract falling $2.025 week-over-week; for instance, Jun 25 Hogs settled at $98.300. This downtrend in futures occurred despite a strengthening CME Lean Hog Index, which rose 41 cents to $92.75 on May 21, and an increase in the USDA's FOB plant pork cutout value to $101.46, largely propelled by a $4.71 rise in the butt primal. Key supply data revealed pork in cold storage at the end of April hit its lowest level since 2004 at 455.803 million pounds, an 8.71% year-over-year decrease, though it marked an 11.32% increase compared to March. Weekly federally inspected hog slaughter, estimated at 2.362 million head, was 38,000 head below the previous week but 9,081 head above the same week last year. Amidst these conditions, speculative traders substantially increased their net long positions in lean hog futures and options by 10,658 contracts to a total of 91,744 contracts as of May 20, signaling continued bullish conviction from this group despite the recent futures price drop. The national average base hog negotiated price also softened to $94.86, down 43 cents from the prior day.

Key Decisions for Investors

• Investors should closely monitor the divergence between recent futures price declines and underlying supportive fundamentals, such as the rising CME Lean Hog Index, higher pork cutout values, and historically low cold storage levels, as this could indicate a potential buying opportunity if fundamentals reassert influence.
• Given the 20-year low in pork cold storage (455.803 million lbs, down 8.71% YoY) and only a marginal YoY increase in slaughter, further supply tightness could support prices; watch for post-Memorial Day holiday data releases for confirmation, as government reports will be delayed.
• Consider the implications of the significant build-up in speculative net long positions to 91,744 contracts, as this bullish sentiment could either fuel a rally if fundamentals align or lead to increased volatility if profit-taking or a sentiment shift occurs amidst mixed market signals.