Trader: Futures

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While 2009 was the year of the ox in the Chinese calendar, it could very easily have become the year of the pig – for all the wrong reasons. Happily, though, swine flu failed to mutate into the devastating global pandemic that the doom-mongers had predicted.

But it did leave some livestock investors squealing in pain, albeit briefly. As health worries spread, the price of lean-hog futures slumped dramatically last summer to a seven-year trough of 43¢ a pound.

Then, as concerns over tickly coughs faded, the public quickly rediscovered its love of pork.

However, the number of sows kept for breeding in the US – the world’s biggest pig-producer – is currently at lows not seen in more than a hundred years.

This shortness of supply has had speculators licking their lips. Although pig numbers can be increased fairly rapidly, the price of lean hogs has fattened up substantially from last year’s scrawny levels, and reached 87.8¢ in April.

On the price chart, the zone around 90¢ has proved significant in the past. Lean hog prices formed major highs near here in the early 1980s and 1990s, and then again in the mid-1990s. Long-term momentum – as measured by the monthly relative strength index – has also reached levels that have accompanied tops in the past.

Seasonal factors are another big influence in lean-hog pricing. The period from March to May is often said to be especially favourable, marking the run-up to the main barbecue season in the US. But April and June have seen more than their fair share of price-peaks over the past three decades as well. A yearly time-cycle has also turned down negatively, which at the very least suggests weakness until mid-August and perhaps even into mid-October.

If a top is indeed forming on the price chart, past experience suggests that lean hogs could suffer losses of 20 to 30 per cent in the months ahead. A sustained move through 91¢ would undermine this bearish prognosis.

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