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. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  2. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  3. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  4. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  5. Chart Advisor

    ChartAdvisor for October 9 2015

    Weekly technical summary of the major U.S. indexes.
  6. Investing Basics

    Learn How To Trade Gold In 4 Steps

    Trading spot gold or gold futures, equities and options isn’t hard to learn, but the activity requires skill sets unique to these markets.
  7. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  8. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  9. Chart Advisor

    These Oil & Gas Stocks Have Reversed

    It's been a long downtrend for oil stock owners, but there's hope. These four oil and gas stocks have reversed and may keep trending to the upside.
  10. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!