Drozd: Hog market slaughtered, as prices fall to 20-month low

Last month I talked about the record-high price of corn and soybeans. As much as this is exciting news to grain producers, especially those fortunate to have a crop, this has been devastating for hog producers.

Near-record-high feed costs and a slowing economy are forcing hog producers in China to sell their herds. Liquidation is also occurring in North America, as producers decide to get out of the business and preserve their equity. With barns aging, many producers are simply retiring.

Animals shipped are heavier than normal and the trade anticipates this may lead to a backlog of heavy animals to still come to market. The Labour Day long weekend signals an end to the summer barbecue season, and demand traditionally slows.

There will be better hog prices in the future, once the exodus is over, but the daunting question for many hog producers remains, "Can I afford to ride out the storm?"

The answer is one that each hog producer must determine for themselves. This creates a great deal of stress on owner/operators. After all, this is their livelihood, with many operations having been passed down from one generation to the next.

It dismays me to hear about the rare and unfortunate incidents in which some of these decent law-abiding folks are treated like criminals for failing to look after their animals. It is unfortunate there isn’t a little more compassion for their plight.

Having grown up on the farm, co-managed a successful family farm operation for 17 years, and having worked in the agricultural community all my life, I have seen what financial stress can do to our rural neighbours. This is in part the reason I founded Ag-Chieve Corporation 10 years ago — to ease farmers’ stress as it relates to their risk management and marketing strategies.

For example, I’ve illustrated in the accompanying chart the two-day reversal (sell signal) that developed on July 31. Hog producers who realized the price was about to drop could take action to minimize their exposure to price risk before prices plunged another $10 per hundredweight through August.

The two-day reversal is just one of numerous chart patterns that signal an abrupt change in trend. When these reversal patterns occur at a new high for a move or at an area of resistance, they take on a greater degree of prominence.

This particular two-day reversal occurred as prices approached an area of resistance between $83 and $84, which was the high in June and July. When the minor rally (bounce) failed to exceed $83, the downtrend resumed.

Two-day reversal

On the first day, the market advances to a new high for the move and settles near the high of the day. On the second day, prices open unchanged to slightly higher but cannot make additional upside progress. Quantity selling quickly appears early in the day to stall the advance and prices begin to erode. By day’s end, the market drops to around the preceding day’s low and settles at or near that level.

Market psychology: The two-day reversal is a 180-degree turn in sentiment. On the first day the longs are comfortable and confident. The market’s performance provides encouragement and the expectation for greater profits.

The second day’s activity is a complete turnaround from the preceding day and shakes the confidence of many who are still long the market. The immediate outlook for prices is abruptly put in question. Longs respond to weakening prices by exiting the market.

By studying the ebb and flow of the market and by watching for reversal patterns, technical analysis can prove to be a useful tool for hog producers when it comes to locking in prices before the market turns down.

Send us your questions or comments about this article and chart.

— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.

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