Hog Heaven

Like clockwork, whenever major media outlets catch on to a major commodity trend, the move is by far overextended, and in an instant, it’s all over before you know it.

Take for example Lean Hog Futures. Last night, The Wall Street Journal let everyone outside of the managed futures know, that the world of Hog Futures was an utopian society, because all involved were quote, “happy, making money and having fun.”

(Disclaimer: Past performance is not necessarily indicative to future results.)

But that was about to change…. As Lean Hogs dropped -1.5% at one point today….

Chart Courtesy: Finviz.com

(Disclaimer: Past performance is not necessarily indicative to future results.)

To be fair, the WSJ article is talking about the year over year move in hogs. Year to date, Lean Hogs is the biggest gain in commodities in the Dow Jones-USB (before today.)  Maybe the Chinese meat processor Shuanghui International Holding had a guess which way prices were heading when they bought out Smithield Foods (ticker SFD) in a $7.1 billion deal a few weeks ago.

There are multiple factors that contribute to the rise in hog futures, The Wall Street Journal explains one reason:

“The jump in prices is helping hog farmers counteract higher costs for feed grains after last summer’s severe U.S. drought, while meatpackers have been able to pass along the higher costs due to ample retail demand. Pork demand has risen due to its lower price compared with beef, which hit record prices at retail this spring.”

But another interesting piece of data surfaced here – that for the first time ever (50 years since hog contracts began), open interest in Hogs has surpassed cattle contracts (maybe Pork is what’s for dinner…) For investors, the takeaway is if you’re hearing about this for the first time now, not get sucked into the hype.  It has actually been a tough market to trade for Hog centric programs like Tanyard Creek and Rosettam which have struggled thus far in 2013. Tanyard, in particular, has been in drawdown (-11.50%) since July, 2012. In recent conversations with the managers both Tanyard and Rosetta have remarked that the market is simply not trading on the fundamentals, perhaps this is due to increased Asian consumption?

In the meantime, most trend followers who are small enough to access this smaller market have been enjoying the ride with the majority of programs we track holding long.

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