The CME lean hog index apparently reached a belated early-autumn peak at 74.98 cents/pound on Oct. 14. It has since worked slowly lower, with last Wednesday’s official quote now expected to come in at 72.13 cents. Its comparative firmness seemed to bode well for the late-2015 outlook and rather clearly provided considerable support for discounted December futures. However, the Chicago market turned lower late last week, and ended Oct. 23 only slightly above the 3.0-cent limit down level. That plunge also did major damage to the technical picture, which probably spurred additional losses early this week.
Wire service sources blamed Oct. 22’s USDA Cold Storage report, particularly the total pork stockpile at 656.4 million pounds. But, as indicated last week, we suspect massive ham stocks at 247.4 million were the main cause, since those raise doubts about late 2015 prospects. That may also explain the futures breakdown and the resulting ballooning of the nearby basis. That is, with less than two months to expiration, the December future ended Oct. 22 at 12.26 cents below the latest index quote (which it cash-settles against).
A look at previous years when fall ham stocks set records show cash hog markets actually held up rather well during the last six weeks of the year. Of course, that may mean little in current circumstances. Still, we are inclined to think the recent futures breakdown has been overdone, so we suggested reducing fourth-quarter hedge coverage.
Editor’s Note: Dan Vaught is a livestock economist for Doane Advisory Services, St. Louis, Mo. Doane distributes a number of timely, relevant newsletters to farmers that contain expert commentaries and market advice. For more information, call 314.569.2700 or go to: www.Doane.com.