Buying Lean Hogs Call Options to Profit from a Rise in Lean Hogs Prices

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Buying Lean Hogs Call Options to Profit from a Rise in Lean Hogs Prices

The price of Lean Hogs is 47.650 USD (per pound) today.

Will LH price drop / fall?

Yes. The Lean Hogs price may drop from 47.650 USD to 41.764 USD. The change will be -12.352%.

Will LH price grow / rise / go up?

Will LH price crash?

According to our analysis, this can happen.

Lean hogs rally on technical buying, rising pork prices

CHICAGO (Reuters) – U.S. lean hog futures rose by as much as 3% on Tuesday on technical buying and short-covering, and as hopes for expanded pork exports to China more than offset pressure stemming from ample U.S. hog supplies, traders said.

Rising pork prices and strong meatpacker margins gave the market further support following a recent drop in hog futures to multi-month lows.

Hog traders are closely following trade negotiations between the United States and China as pork exports appear likely to benefit. China needs imported pork because African swine fever has decimated its hog herd, but retaliatory tariffs on U.S. shipments to China remain in place.

U.S. President Donald Trump on Tuesday dangled the prospect of completing an initial trade deal with China “soon,” but offered no new details on negotiations.

“We’ve got really large supplies. But, on the other side of that, demand is really supposed to pop up with the Chinese,” said Don Roose, president of U.S. Commodities.

“President Trump talked tough on China today, but at the same time said we’re close to a deal. The market wanted to run with it but wasn’t quite sure,” Roose said.

Traders are awaiting confirmation of any new pork sales to China, as well as loadings of recently purchased meat, he said.

Chicago Mercantile Exchange (CME) December lean hogs, which hit a two-month low on Monday, ended 1.425 cents higher at 64.725 cents per pound.

February hogs climbed 1.825 cents to a three-week high of 75.550 cents per pound after holding technical support at its 100-day moving average and breaking through chart resistance at its 20- and 50-day averages.

Tightening global pork supplies have lifted U.S. pork prices this autumn, a time when they would typically decline, the CEO of meatpacker Tyson Foods said.

The wholesale pork cutout price jumped $2.19 on Tuesday to $88.53 per cwt, up $9.03 from a week ago, U.S. Department of Agriculture data showed.

Pork packer margins swelled to $84.55 per head, up from $60.45 a week ago, livestock marketing advisory service HedgersEdge.com said.

CME live and feeder cattle futures ended mixed as cash market prices remain firm, but traders questioned how much further the market could climb.

Actively traded February live cattle futures, which touched a 6-1/2 month high on Monday, closed down 0.100 cent at 125.575 cents per pound. January feeder cattle ended unchanged at 147.125 cents per pound, a six-month high.

Reporting by Karl Plume in Chicago; Editing by Marguerita Choy

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Commodities Corner

Lean hogs rally as China exempts pork from additional tariffs on U.S. goods

Myra P. Saefong

China’s move comes as African swine fever continues to kill off its hog herds

China’s pork prices reportedly rose 46.7% in August, compared with a year earlier

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Lean hog futures rallied on Friday following Beijing’s decision on Friday to exempt pork from additional tariffs on U.S. goods.

China’s decision followed a spike in its pork prices, as the nation continues to struggle with the decimation of its hog population that continues to suffer from African swine fever.

Futures prices for lean hogs in Chicago rallied on Thursday and Friday, with the front-month October contract US:LHV19 up 3.3 cents, or 5.2%, to settle at 66.47 cents a pound on Friday. That was the contract’s highest finish since Sept. 4, according to FactSet data. Prices also tallied a gain of 4.7% for the week.

The decision from the Customs Tariff Commission of the State Council in China followed the U.S. decision to make adjustments to the additional tariffs to be imposed on Chinese goods on Oct. 1, Xinhua New reported Friday.

President Donald Trump announced late Wednesday that he will delay implementing higher tariffs on $250 billion of Chinese goods for two weeks. In a series of tweets, Trump said the tariff hikes—from 25% to 30%—that were scheduled to take effect Oct. 1 will now go into effect Oct. 15.

The market has seen “speculative buying on the idea that China will be buying more U.S. pork in the future,” John Payne, senior futures and options broker with Daniels Trading told MarketWatch. Still, “the report that China will exempt pork from additional tariffs doesn’t mean that they are lifting tariffs.”

It’s also important to note which contracts are moving, he said, pointing out that the rise in the October contract has been lagging behind gains in the December contract.

The more active December lean hogs contract reached the limit gain in Chicago Friday, settling up 4.5 cents, or 7%, at 68.70 cents a pound.

“The idea that China will buy more pork is pricing the futures higher in the months behind the front month. The U.S. has plenty of hog/pork to meet this demand in the short term,” said Payne.

Prices for the most-active lean hog contracts have climbed by more than 9% year to date, down from double-digit percentage gains seen earlier this year when concerns over African swine fever (ASF), a contagious disease that is nearly 100% fatal for domestic and wild pigs, were at their peak.

ASF has “decimated China’s hog population,” said Ned Schmidt, editor of the Agri-Food Value View report. It seems that China sees imports as an answer to its pork shortage, and the U.S. “is one great source.”

China’s pork prices rose 46.7% in August, compared with a year earlier, according to a Tuesday report from the South China Morning Post, citing recent consumer price index data. That was almost double the 27% rise witnessed in July, the report said.

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The record high hog prices in China, along with the tariff exemption and solid U.S. weekly exports sales to China have fueled the move higher in hog futures, said David Maloni, executive vice president of analytics at ArrowStream, a foodservice supply chain technology company.

Markets see all of this as a sign that a “tipping point is near, where China will tighten the world pork supply due to the decimation of their hog herd by African Swine Fever,” said Maloni. He expects the U.S. hog and pork prices to see volatility going forward.

Meanwhile, Payne said that China imported more pork from the U.S. in July than at any point since the 2000s.

But the problem for U.S. prices is that the “hog herd here has grown drastically as well,” said Payne. so the “trade is tied between a massive U.S. hog herd and a cash prices that [do] not seem to have a lot of room to rally,” without massive exports and this story out of Asia, he said.

Payne said he doesn’t see much upside for lean hog prices above the low 70s cents per pound in the December futures contract.

What would cause prices to “really jump” would be a reduction of the old tariffs on U.S. pork, which were implemented during the Obama administration and remain in place, he said.

“We believe hogs are a buy at some point, but it’s not like buying a stock or even a commodity like corn,” said Payne. “You can’t store a live animal. Weights and slaughter are risky; supply is available. We need someone to buy it, and buy it soon.”

Lean Hogs Futures and Commodities

paul mansfield photography / Getty Images

Lean hog futures are critical hedging instruments for the pork industry and because of the volatility of hog prices. Trading in these futures often attract plenty of speculative positions. The lean hog is another term for pork that is traded on the options and futures exchanges of the Chicago Mercantile Exchange (CME).

Contract Specs

Some important characteristics of the lean hog futures contract are as follows:

  • Ticker Symbol: LH
  • Exchange: CME
  • Trading Hours: 10:05 a.m. to 2:00 PM EST
  • Contract Size: 40,000 pounds
  • Contract Months: Feb, Apr, May, Jun, Jul, Aug, Oct, and Dec.
  • Price Quote: price per pound
  • Tick Size: $0.00025 or 2.5 cents per pound = $10.00 (0.00025 x 40,000 lbs).
  • Last Trading Day: The tenth business day of the contract month

Fundamentals

Most hog production occurs in the Midwest. The largest hog producing states are Iowa, North Carolina, Minnesota, and Illinois. The U.S. is the world’s largest pork exporter. Typically, it takes six months to raise a pig from birth to slaughter. Hogs are generally ready for market or slaughter when they reach a weight near 250 pounds.

A market hog with a live weight of 250 pounds will typically yield 88.6 pounds of lean meat (Pork Facts 2001). This lean meat consists of an average of 21% ham, 20.3% loin, 13.9% belly, 3% spareribs, 7.3% Boston butt roast and blade steaks, and 10.3% picnic. The rest goes into jowl, lean trim, fat, and miscellaneous cuts and trimmings (USDA-AMS).

Pork bellies, which used to trade on the CME, are mainly used for bacon and can be frozen and stored for up to a year before processing. The contract was discontinued due to a lack of liquidity.

Seasonality tends to lead hog prices higher between May and July the heart of grilling season in the United States.

Corn and Hogs

The price of corn has a strong correlation with lean hog futures because hogs eat corn. If the price of corn rises substantially, farmers tend to take their hogs to market at lower weights (younger) to avoid high feed costs. At these times, lean hog futures prices tend to drop due to increased supplies.

One can estimate the future amount of hog production by monitoring the Hogs and Pigs Report. When the number of newborn pigs is lower than in previous quarters, it is likely that hog production will be lower in six months later when they are ready for market.

Reports

The Hogs and Pigs Report comes out quarterly. The hogs report presents data on the U.S. pig crop including inventory numbers and weights. The data highlights the current supplies and projected supplies for the future. The CME Lean Hog Index is a two-day weighted average of cash prices.

Developments Over Recent Years

Pork is a staple animal protein around the world. Over recent years, the hog futures market has experienced a great deal of price volatility.

In 2020, lean hog futures rose to all-time highs at over $1.33 per pound when porcine epidemic diarrhea or PED caused the death of over seven million suckling pigs, creating a pork shortage and caused the price of the animal protein to skyrocket. An effective immunization has prevented further outbreaks of PED. In 2020, the price of lean hog futures moved back to the 60 cents per pound level.

In 2020, the Chinese bought the largest U.S. hog processing company Smithfield Foods. While there was some opposition, the sale of the company was eventually approved by Congress, and now China controls an integral part of the U.S. and international pork market.

With over 1.3 billion people to feed, the purchase of Smithfield Foods is another example of China’s appetite for commodity resources around the globe. Pork is a vital animal protein and a staple in the diets of many people.

The world population has increased exponentially, and competition for food will continue to strain the fundamentals of lean hogs and other foods when supply shortages appear. Demographics are likely to cause new highs in many food markets during periods of tight supplies.

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