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)