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Hog Fundamentals With Luke Wells · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_00: Welcome to the Professional Ag Marketing Podcast.
• 0:04
  SPEAKER_00: If you want a deep dive into the ag markets and risk management strategies, your search is over.
• 0:10
  SPEAKER_00: Come here after every Friday to get your weekly commodity recap.
• 0:14
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_00: This is your host, Mike Minor.
• 0:22
  SPEAKER_00: Let's get started.
• 0:24
  SPEAKER_00: Today is March 18th, and I've got Lucas Wells with us here today.
• 0:28
  SPEAKER_00: How's it going?
• 0:29
  SPEAKER_01: It's going good, Mike.
• 0:30
  SPEAKER_00: Awesome.
• 0:30
  SPEAKER_00: Well, it was a longer week in the markets all the way across.
• 0:34
  SPEAKER_00: We ended the week on a little bit of a rough note across many of these egg commodities.
• 0:39
  SPEAKER_00: May corn down about 13 at the end of the week here to 742.
• 0:44
  SPEAKER_00: Had a nice spike in the grain market here through about midweek and then it backed off a little bit.
• 0:51
  SPEAKER_00: So seeing a lot of sideways in those front months on the corn futures.
• 0:55
  SPEAKER_00: Dees corn in those further back months, they didn't get at hit as hard today, anyways, as some of the other commodities in the front month on corn futures.
• 1:04
  SPEAKER_00: We had a high at 658 on the December board here on Monday.
• 1:08
  SPEAKER_00: So that was a new contract high.
• 1:10
  SPEAKER_00: Through the end of the week on the grains, one thing I noticed, Luke, that you'll maybe chime into with uh some of the other commodities this week was towards the end we saw a lot of the front months get sold off hard, and those back months held a little bit of premium.
• 1:24
  SPEAKER_00: So to me, I saw a lot of uh long funds that were uh weeklongs kind of get out of the market here ahead of the weekend to uh maybe try to reposition next week uh if anything would go on here this weekend.
• 1:35
  SPEAKER_00: So that was one of my observations with kind of the end of the week trade here.
• 1:39
  SPEAKER_00: So soybean market down about a penny at the end of the day, nothing too crazy there.
• 1:44
  SPEAKER_00: The November bean market 1466 to end the week.
• 1:48
  SPEAKER_00: Uh, we did see a high there, 1504 on the November beans, as we found some resistance around 15 bucks there.
• 1:55
  SPEAKER_00: We kind of led the way lower here at the end of the week.
• 1:58
  SPEAKER_00: Chicago down over 30 in those front couple months.
• 2:01
  SPEAKER_00: Uh, a little bit of a rough trade there.
• 2:03
  SPEAKER_00: We'll talk about energy a little bit today as well, with uh Luke here being present.
• 2:07
  SPEAKER_00: We ended the week uh green just up about two bucks, but that was a very uh difficult week for uh many of the oil traders out there, I'm sure, this week.
• 2:16
  SPEAKER_00: And uh Lean Hogs, as we're getting to that here a little bit, Luke, uh you want to dive into uh a little bit of the rougher hog week.
• 2:23
  SPEAKER_00: You know, we talked about how volatility can be awesome.
• 2:26
  SPEAKER_00: Uh it create wonderful opportunities as we saw last Friday with one of the highest DC hog crushes to date that we've seen.
• 2:34
  SPEAKER_00: Um, how are we looking at the end of this week uh after some different changes?
• 2:38
  SPEAKER_01: Yeah, Mike, we won't uh we won't call this a win in the lean hog complex this week.
• 2:42
  SPEAKER_01: The Bears, the Bears were the winner, winner of the week.
• 2:45
  SPEAKER_01: And yeah, to your point, uh last Friday we kind of ended you know the DES 22 crush on a not a quite a contract high, but but right up there.
• 2:54
  SPEAKER_01: Um but this week with uh largely lean hog revenue, really corn wasn't that crazy different week to week.
• 3:01
  SPEAKER_01: Uh we took six bucks a head off, um, which is a pretty significant week-to-week drop.
• 3:06
  SPEAKER_01: Um so it was hard, hard to watch uh, you know, the forward curve on the lean hog uh lean hog futures, and we we did set back pretty severely and and and you know a lot of it really is you know driven by the front.
• 3:21
  SPEAKER_01: Continue to have a lot of a lot of volatility um in this as you suggested, and the you know, the sore thumb, if you will, the problem we've got kind of going on in the pork complex is is pork cutout values.
• 3:33
  SPEAKER_01: Um you know, we we've just kind of trended sideways on those, and and um you know it's it's it's not unnormal.
• 3:41
  SPEAKER_01: If you take a look at pork cutout, you know last year defied trend.
• 3:44
  SPEAKER_01: Last year we just kind of went straight up all the way through this Linton season, you know, pretty much into the summer, right?
• 3:51
  SPEAKER_01: Um but if you take a look at the five-year seasonal, it is not uncommon.
• 3:55
  SPEAKER_01: Uh, you know, March and early April are not known for great hog months, right?
• 3:59
  SPEAKER_01: Over over history, and it's you know, as we get some of the holiday hams bought and whatnot, it's it's we sure can take a pause and and take a backup in product, and it and unfortunately looks like that we might be doing that just right now.
• 4:12
  SPEAKER_01: And futures have tried to maintain some optimism, and you know, it wasn't just dece that got hit this week.
• 4:17
  SPEAKER_01: I mean, April had a had a tough week.
• 4:20
  SPEAKER_01: In fact, we closed April under 100, first time we've done that in a while at 99.40.
• 4:25
  SPEAKER_01: Um June had been carrying a pretty significant premium to April.
• 4:30
  SPEAKER_01: Um, and April didn't trade that crazy this week.
• 4:33
  SPEAKER_01: I mean, it was down uh on the week.
• 4:36
  SPEAKER_01: April was down 330.
• 4:38
  SPEAKER_01: Um, but June kind of took uh you know a high and a low range this week pretty severely.
• 4:43
  SPEAKER_01: We we had June hogs, you know, the very early part of this week.
• 4:47
  SPEAKER_01: We we traded, you know, back up almost near contract highs.
• 4:50
  SPEAKER_01: Actually, like on the 16th, we went to 122 and we ended the week at 116 with the June.
• 4:57
  SPEAKER_01: And traders, you know, I mentioned that this is a tough time on the port cutout, just kind of seasonally.
• 5:03
  SPEAKER_01: But then we get through Lent, we get through May, and a lot of times hog supply becomes even uh even less through the summer.
• 5:09
  SPEAKER_01: That's a very very normal pattern, and we'll you know a lot of times we'll go set our our product highs, you know, in the June, July, the summer type time frame, right?
• 5:18
  SPEAKER_01: So um there was a lot of optimism in that June contract, but it's just the trade went on this week and pork cutout stayed flat and really flats, bearish.
• 5:26
  SPEAKER_01: Um you know, we we we had June back up and take some of that premium out, and of course April's trading the you know the front end fundamentals and and just kind of dragged the whole curve lower.
• 5:37
  SPEAKER_01: Um along with that, uh you know, kind of kind of on this uh demand side, the bear side, uh along with the seasonal, I mean, we've got all these things happening here domestically that that is tough on consumer dollars, right?
• 5:52
  SPEAKER_01: You take a look at national gasoline price, you know, we're at like 430 nationwide average, and obviously as you get to the coast, especially the west, um, some really high gas prices out there where a lot of consumer demand is.
• 6:05
  SPEAKER_01: And is this war?
• 6:06
  SPEAKER_01: I mean, we had you know, all through the week with you know, alleged peace talks maybe came out, and I think that was Wednesday, which which was in in my opinion uh a far sight from a peace talk.
• 6:16
  SPEAKER_01: It was more uh really just you know giving it.
• 6:20
  SPEAKER_00: De-escalation is what I'm calling it.
• 6:22
  SPEAKER_01: Yeah, tough for me to see that.
• 6:24
  SPEAKER_01: I didn't see any back off on Putin's concerns there.
• 6:27
  SPEAKER_01: But inflation continues to to run in hyperdrive.
• 6:30
  SPEAKER_01: I mean, we're seeing that across all sides of the supply chain.
• 6:33
  SPEAKER_01: Consumers are feeling that the Fed um came out 0.25, which is probably a little less uh a little less aggressive than some thought it might be, but still it's you know it's turned you know from this is a transitory thing to definitely a hawkish inflation stance.
• 6:48
  SPEAKER_01: So, you know, all that's kind of you know weighing on this hong complex.
• 6:51
  SPEAKER_01: And um, you know, we still have a lot of good things going on in the pork uh complex.
• 6:55
  SPEAKER_01: Supply is still low, maybe six to seven percent less hogs than a year ago.
• 7:00
  SPEAKER_01: Cash hogs actually, um, those continue to perform well.
• 7:05
  SPEAKER_01: Um, and we ended the week two dollars higher on the cash.
• 7:09
  SPEAKER_01: Um uh and you know, but with that, it's it's less hogs are you know, the index is what futures settle to, and more hogs are priced on cutout.
• 7:17
  SPEAKER_01: So this this soft cutouts hurting our index pricing.
• 7:20
  SPEAKER_01: And it's it just had us on the defensive this week.
• 7:22
  SPEAKER_01: Um, not saying that we can't turn around um and move this thing back higher, but the market's gonna want to see the cutout move to do that.
• 7:30
  SPEAKER_01: And you know, history would say we chug a little sideways here for a few weeks, so it might be a button that hatches down type thing.
• 7:37
  SPEAKER_00: Anything else you're looking forward to on the hog side of things that could make things uh get pushed around a little bit or that you're looking for a little bit more outside uh the box type mind frame?
• 7:49
  SPEAKER_01: Uh I mean, yeah, keep your head on a swivel, right?
• 7:52
  SPEAKER_01: Just I mean, things come and go really, really quick.
• 7:54
  SPEAKER_01: And you know, we've we've obviously, you know, I focused most of this discussion on you know on the hog revenue piece, but you heard me reference margin quite a bit and and and costs and corn, right?
• 8:04
  SPEAKER_01: Uh beans, um, you know, that can swing our hog crush really severely too.
• 8:08
  SPEAKER_01: So, you know, when we talk about you know, December's trading up near contract ties into last week, 88 or you know, area settle down at 84.
• 8:18
  SPEAKER_01: Um, you know, if if corn would sell off, that's not you know necessarily the trend or direction, but that can change things.
• 8:24
  SPEAKER_01: So just let's let's have a plan, um, yeah, which we all do, right?
• 8:28
  SPEAKER_01: Every business has its own risk tolerances, and you know, we get some opportunities, especially in that, you know, that you know, October more so December time frame.
• 8:37
  SPEAKER_01: Um, you know, what as you get close to that$90 number, which which we saw, you know, end of last week, early this week, it's a pretty high deep price.
• 8:45
  SPEAKER_01: Um last year was a really good hog year too, and D settled at$72.30 if memory serves me.
• 8:51
  SPEAKER_01: So we we want to look for spots to to take off risk.
• 8:55
  SPEAKER_01: Uh April's we, you know, basis has been right.
• 8:57
  SPEAKER_01: You know, we're now we're kind of caught up and pretty much systematic there.
• 9:01
  SPEAKER_01: Um, you know, we'll stay kind of on the front there.
• 9:04
  SPEAKER_01: Summers, you know, if we do push back up, get some premium back in it.
• 9:07
  SPEAKER_01: That's a business decision if you want to lay a little off or or stay open for the summer, but our I don't on your new or addition additional sales, but you know, really the focus is going to be in that December time period, not just for the Nov D's time frame, but um, you know, we we like to park edges in December because there's more volume in that D23 contract, plus the spreads into 20, I'm sorry, D 22 contract, plus the spreads into 23 are too narrow.
• 9:32
  SPEAKER_01: And you know, we want to take advantage of this as far as we can, and um, we're not uncomfortable to park some extra hedges four to six months in that December and roll out into 23.
• 9:42
  SPEAKER_01: And that's you know, that's kind of where we're looking at next, is how do we just extend these you know positive margins out further?
• 9:48
  SPEAKER_01: But we want to do it in crush.
• 9:50
  SPEAKER_01: Um, a lot of things uh, you know, really good on the on the hog side that in the board I talked kind of negative this week, but we still have April hogs at about a hundred bucks, and we got June hogs at you know 116, still really high prices.
• 10:03
  SPEAKER_01: But you know, with all the things going on and you know in the in in in the globe, uh, especially on the inputs, you know, not on the just the planting and harvesting of crops, but fertilizer and whatnot, we really got to watch our crush and our margin.
• 10:15
  SPEAKER_01: So making sure we we take a focus and and continue to find spots to work for our business and uh uh and take steps forward, Mike.
• 10:24
  SPEAKER_00: Well, you can't spend enough time these days on the input side of the margin sheet, can you?
• 10:29
  SPEAKER_00: Between the volatility and the risk of of corn futures, natural gas, all of these things, I mean, those can really impact the margin uh today on these hog markets.
• 10:40
  SPEAKER_00: So something to look at uh really hard going forward, something to not sleep on at all.
• 10:45
  SPEAKER_00: The strategies like looking at uh December 23 corn, for example.
• 10:50
  SPEAKER_00: There's been a lot of that in the last week or so on this dip in these uh in these grain prices.
• 10:55
  SPEAKER_00: So thank you for spending a little bit of time uh with us on that.
• 10:58
  SPEAKER_01: Yeah, just a few other comments too.
• 11:00
  SPEAKER_01: And just you know, I think we've touched on this in past podcasts, but you know, it's it's part of the reason we we definitely have less sows around less inventory, but health issues continue to be a challenge in our industry, and and you know, that takes supply off the market and it pushes the markets higher.
• 11:14
  SPEAKER_01: But you know, with with more death loss in production systems, it it also it raises your cost of production, right?
• 11:20
  SPEAKER_01: So it's you know, there might be a little bit of false uh um uh uh what do you call it margin in it, right?
• 11:27
  SPEAKER_01: It looks really good, but producers really got to watch their cost structures if their mortality is higher than normal, which it is, uh freight, fuel's higher, milling feeds higher, inputs are higher.
• 11:37
  SPEAKER_01: It's yeah, this is and we you know that's one of the reasons, you know, why months ago we changed our margin model and put inflationary costs in it.
• 11:44
  SPEAKER_01: Um, because cost side is it's it's much more difficult on all sides of the equation.
• 11:49
  SPEAKER_01: And it in this world it doesn't look like that gets better quicker.
• 11:53
  SPEAKER_01: It it's gonna be a challenge for the foreseeable.
• 11:55
  SPEAKER_01: So um, you know, making sure we really have a sharp pencil on our cost of production is it's gonna be critical um when we sell hogs that we have margins there and uh and stay focused on you know looking at the net number, not just one of the legs by itself, right?
• 12:10
  SPEAKER_00: Exactly.
• 12:11
  SPEAKER_00: So as we wrap things up here a little bit, I am gonna just finish talking about some of these more macro things that we focused on today.
• 12:19
  SPEAKER_00: We've talked more about crude oil and gas prices here recently than uh we normally do with the volatility there, and uh we saw a little bit of a bubble here and uh probably saw a bubble implosion uh here as of late.
• 12:31
  SPEAKER_00: We saw, like most bubbles, this one was kind of short-lived.
• 12:35
  SPEAKER_00: It had followed uh by an equally sudden drop in prices that we saw this week, which you know, uh this had many characteristics of a flash crash.
• 12:44
  SPEAKER_00: We had a lot of stop orders getting hit underneath of longs uh kind of that uh had been placed in the market, and it really forced a sell-off.
• 12:52
  SPEAKER_00: And it it kind of appeared that that short-term trigger that uh that um improved prospects of uh a truce between Russia and Ukraine had kind of been that short-term trigger, anyways, or a de-escalation of conflict like we talked about earlier, uh, that would allow for some of Russia's oil exports to continue, and some of those things had really pushed oil prices down this week, pushed uh grain prices down, etc.
• 13:18
  SPEAKER_00: So we saw a little sell-off in some of those macro uh commodities here through the week.
• 13:24
  SPEAKER_00: So at this same time, you know, not to just focus fully on the the war side of things, but we did see a rising number of coronavirus cases in China that has resulted in some uh a little bit more aggressive lockdowns locally there in China, threatening uh a slowdown in oil consumption there.
• 13:42
  SPEAKER_00: So there has been some talk and worries uh about uh uh global economic growth, and uh some of those concerns are continuing.
• 13:50
  SPEAKER_00: So uh not just that though, we've got a hawkish Fed, uh not as much of a dovish one as we've become accustomed to.
• 13:57
  SPEAKER_00: Uh not quite Jimmy Carter-esque yet, but uh we do have uh rising interest rates present now anyway.
• 14:04
  SPEAKER_00: So something to look at going forward.
• 14:07
  SPEAKER_00: I would figure this is not gonna be um going away anytime soon here, any of these topics.
• 14:13
  SPEAKER_00: So please, if you have any questions about what we talked about today, uh please re reach out to Luke or I or anyone else on the team, and we would love to hear some feedback.
• 14:23
  SPEAKER_00: But as we wrap up here today, Luke, I uh am going through our office bracket for uh college basketball.
• 14:31
  SPEAKER_00: And uh, you know, you're about middle of the pack, you're not doing bad, but you're not, you know, you're not in second like I am.
• 14:37
  SPEAKER_00: So we'll see how the tournament shakes out here.
• 14:39
  SPEAKER_00: Let us know if any of you actually have a perfect bracket left.
• 14:42
  SPEAKER_00: There's only a hundred or so left in the world out of seventeen million, but uh hey, we work with some pretty cool people, so there might be one out there.
• 14:50
  SPEAKER_00: Thanks, Luke.
• 14:51
  SPEAKER_00: Thank you, Mike.