Pork prices have been curiously stable lately even as news of the deadly pork virus known as Porcine Epidemic Diarrhea PEDv starts to make headlines again. As many commodity traders know, the virus has resulted in the killing of up to 7 million pigs over the past year, putting pressure on the pork supply. As economics dictates, the strong imbalance in supply and demand has resulted in pork prices moving sharply higher. To make matters worse, in late May an Indiana farm confirmed that it had experienced a second outbreak, causing key players to become nervous that this will lead to more outbreaks. From a financial perspective, traders will want to follow these developments closely, as they will undoubtedly influence pork prices and the companies that rely on pork in their day-to-day operations.

Taking a look at the Dow Jones-UBS Lean Hogs Sub index, which was created to track the changes in Lean Hog futures prices, you’ll notice that the price moved sharply higher in March and has since started drift back down toward the 200-day moving average. This level (red line) is of specific interest to short-term traders because it has propped up the price on several occasions over the past year (shown by the blue line). From a traders perspective, the risk/reward ratio is becoming more favorable each day as the gap between the current price of pork on its 200-day moving average narrows. Bullish traders will likely look to add a position over the coming weeks, and it wouldn’t be surprising to see pork prices head higher again as we enter the summer months. (For more, see How To Invest In Commodities)

Trading Pork-Related Companies

Given the outlook for pork prices suggested above, it's natural for traders to look into pork-related companies for opportunities. Tyson Foods, Inc. (TSN), the largest meat producer in the U.S and the second-largest in the world, is usually a good place to start when doing research related to the livestock sector. The company recently reaffirmed its long-term outlook and its plans to increase its top-line growth by 3-4%. Based on PEDv, TSN expects to reduce hog slaughter levels and production levels this summer by 4-5%. This could be a further catalyst to higher prices and should be watched closely by traders as a leading indicator.

As you can see from the chart below, Tyson's shares are currently trading near an all-time high. Notice how the $44 level seems to be acting as a strong area of resistance and has prevented the bulls from sending the price higher over the past few months. From the perspective of technical analysis, a break above $44 on higher-than-average volume would be an extremely bullish signal and would suggest that little overhead resistance would lead to a strong longer-term move higher. It may be prudent to wait for the price to move above $44 before entering a position or wait for the price to move closer to its 200-day moving average in an effort to maximize the risk/reward. (For more, see Support And Resistance Basics)

The Bottom Line

Recent news of a further outbreak of Porcine Epidemic Diarrhea PEDv has traders concerned that supply levels will be drastically impacted as we head into the summer months. Higher pork prices, in combination with comments from Tyson Foods Inc. about reducing its slaughter levels, have resulted in bullish trading setups that could be the catalysts used by traders when looking for opportunities. (For more, check out Learn To Corral The Meat Markets)

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  3. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  4. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center