In case you haven’t noticed lately, hog prices have staged a major recovery. (Until the past week.)
The surge that began back in August continues still, dragging up April Chicago lean hog futures from around $55/cwt to around $70/cwt. For most American market hog producers that’s a profitable level, and while Canadians are still losing money at that level, it’s much closer to break-even than almost anyone expected a few months ago.
Here’s a chart of weekly hog futures prices showing the rally.
That’s about as strong a rally as you can see on the charts short of the exponential, parabolic increases that sometimes occur in the final, blowoff stages of a rally in things like sugar or wheat every few decades. This doesn’t make hog prices high, by any means, but it makes them a heck of a lot less low than the prices that were driving legions of hog producers out of the business a few months ago.
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Almost everyone’s surprised by it. As Tyler Fulton, the manager of risk management at Manitoba Pork Marketing Coop told me this morning, prices “have made a miraculous recovery in a very short period of time . . . Nobody expected us to be chasing (break-even prices) at this time of year.”
Ron Plain of the University of Missouri told me a similar thing Friday: “It’s most unusual to be that strong at this time of year.”
So that brings the question of how long it can go on. How high can prices move in the present situation? Smithfield just announced it’s shutting an Iowa plant because it has too much capacity and too few hogs to kill, so that undermines the potential. On the other hand, every week towards spring brings us closer to the higher-price half of the year, which supports the idea that prices could keep rising.
Just for fun, I thought I’d show you the weekly chart I just showed you above, but with the Relative Strength Index beneath. Remember the RSI? I talked about it here last week. When it’s under 30, it suggests the market is oversold and possibly due for a rally. When it’s over 70 the market is technically overbought and likely for a drop.
It’s tickling the bottom of the overbought level, but not in that territory yet. So that might make you want to see this as a selling opportunity. The RSI worked pretty well at the turning of the market back in August. Just as prices hit their bottom, the RSI dropped beneath 30. So you could say it’s been working pretty well. But look back a bit further to June. It didn’t exactly yell out “Sell Now!!!” did it? That’s when the market rolled over and took us pretty deep. And in February it was suggesting a rally was coming, which didn’t happen.
Well, let’s look at a daily chart, to see if that clarifies anything:
Quite a different story, isn’t it? So much for being overbought. The RSI is now floating right around 50, which is dead-centre middle of the road, after prices sold off in the past few days. Weekly and daily charts obviously look at different markets – short term and longer term – with the weekly lagging the daily. But on neither did the RSI go over 70 before this drop, although it hinted it might be thinking about it.
So once more the RSI shows itself to be a useful hint of where prices are going, but far from a sure thing.
