Learning from the Pig Market The advent of ASF [African Swine Fever] is instructive of all markets and is material to our understanding of how markets work. The onset of the disease drove many Chinese farmers to liquidate their herds before their own pigs caught the disease and died. This created a surfeit of pork that only recently has been depleted along with government emergency supplies of pork in China. Hedge fund managers were quick to seize on the implications of this global event and as the details and severity were revealed, many investors with little knowledge of the pork market began investing in the lean hog contract using deferred contracts selling at large premiums to the current cash. Simultaneously, U.S. pork producers ramped up the production facilities to deliver what is now at the end of 2019 the largest supply of pork ever. [2.8 million hogs last week or 10% more than last year] Hedge funds have lost millions of dollars on this bet as they find themselves gambling on one of the most opaque markets in agriculture. Of the 2.8 million pigs slaughtered in a week, 50,000 head are traded in the cash markets. In a recent week, those 50,000 head traded for a base price of $42.48. The remaining pigs across the country were traded according to formulas returning an average of around $60 cwt. close to the futures price. Another half million pigs traded for $65 or $23 over the cash traded pigs. Many of those speculative bets were placed in the December contract when it was selling at $70. As the speculators close those contracts at $60, many wonder if it makes sense to jump out into the April futures currently selling for $76 – a $16 premium to the current spot contract. Global demand for pork is up and exports are running well above last year but gambling on a market not well understood by the financial community makes managers uncomfortable. Our own cattle markets are becoming opaque. Two of the largest states do not even report cash prices anymore [Texas and Colorado]. In the south nothing traded in reportable transactions after Thursday of this past week even though comparable sales in the north traded up to $122. Packers didn’t dare buy more cattle in the south because to do so would price 90% of their slaughter higher. Hedged formula sellers in the south got killed after pricing cattle at $119 and covering futures at $122. With feedlot occupancy high and optimism in the air, have speculators overshot the spring markets for cattle currently trading $5-7 over the current cash? Are the cash markets becoming less meaningful? Are formulas the best way to market cattle? Negotiated grid sales present a viable option for all cattle trading with the base price negotiated and each lot competing with plant averages for premiums and discounts. Of course, USDA would need to publish the regional base prices negotiated – a big hurtle.
HE from CME has been rather stable at around 69. China Exchanges are extremely huge. Unfortunately only very few products are open for foreigners to trade. Also you can't get much info about China. If you google, you'd get info about US and not China..
I am sure they are major players as they need to do hedging. HE day range has not been great. It is about 1.5 points, ie 2%. Not that great for day trading actually. occasionally day range might exceed 5%. Better let the farmers and spreaders trade HE and we trade other things. Most food futures (coffee, soya, cattle, milk ..... ) behave similarly. so all my food futures charts are in my archive folder.
Hogs and Live cattle are good markets for swing trading as well as options in my opinion. Not so much for short term trading.... At this point a break above 71.55 basis the February contract can start a short covering rally:
I been a very long term buyer/hedged since Aug 2019, Hogs produces it's own patterns as far as finding tops/bottoms using weeklies, so S/R is best after free falling, look for cluster bottoms near low 60s and lower. Although traded for very long term of much in/out, I think those who swing trade do better. If I didn't hedge, I would lose horrible in this market, but gives nice 10 point moves and wait on other half for huge move. Very few decent patterns for day trading, but like gap opens beyond Bollinger or it is scalped. I prefer Live Cattle or Feeders.
My risk management IS my edge, have spent past 9 years trying many ways to get risk at time of entry at positive expectancy, otherwise no trade. So not going to share my edge. Didn't read much if at all on how to do it when I started in 2010, learned hard way, by backtesting 100's of ideas, have to really be open minded like trading Lumber which has no options and finding a lumber minded stock showing same price action and using it's options for the hedge. What I will say, hedges are not kept for entire duration, think in terms of when is position most risky, and most know of me, I have short attention span whether scalping or very long term, based on backtesting of MFE and Time on profitable attempts. Price has to get to a "breakeven" stop in so many bars or total position is unwinded. Time seldom on my side because I generally not doing breakouts, waiting for price to come to area for entry and average down. Automation will at some point just enter if was unable to find lowest lows patterns and be able to acquire enough options. This is often biggest problem of hedging futures not overpaying and quantity. I have developed patterns when price most likely will reverse, some I have explained in past posts and please don't ask which one's, so I hedge open profits, but impossible of knowing whether be retracement or major trend change. Happy Holidays all.