Last week I was saying that after falling for 6 straight days, the hog market was finally showing signs of life—the spot market had stopped falling, and the exchange had stepped in to cool bearish sentiment. Everyone was hoping the market would stabilize.
But the outcome made those hopes look badly misplaced. Futures took another nosedive as soon as trading opened on Monday.
The most-active contract opened at 9860 today, then fell throughout the session, hitting a low of 9550. Its decline briefly exceeded 3%.
Last week’s low was still 9790, and this time it dropped by more than 100 all at once.
The latest figure received was 9560, down 2.94%.
But looking at the whole of last week, 2701 had already fallen by 665 yuan, a drop of 6.34%.
Good grief, it’s one pitfall after another.
However, spot prices are basically unchanged from yesterday, with no major fluctuations, which is at least a little reassuring.
But futures plunged sharply, which is really painful.
Why did prices suddenly plunge again when things seemed to be going just fine?
First, bearish sentiment is strong.
Sometimes bearish sentiment is emotional, but sometimes it is also rooted in reality.
The current hog market is under constant pressure. The pattern of strong supply and weak demand is not only unlikely to change in the short term, but is also basically very difficult to reverse in the long term.
For example, in 10 month, planned hog shipments by large-scale enterprises are still increasing month on month, and the average shipment weight is also still rising.
What does this indicate?
This shows that whether they are large or small producers, or individual farmers, everyone is rushing to sell pigs.
When will all these pigs be sold?
Who knows? In any case, they won't all be sold in the fourth quarter.
And are they expecting curing and preserving to absorb all these pigs?
Then how much could it possibly absorb?
That's unrealistic.
Not to mention the large inventory of frozen products—the market doesn't have enough capacity to absorb it.
So the fact that the peak season isn't thriving keeps being confirmed.
Against this backdrop, sentiment naturally will not be high; it can only keep falling.
Second, the bears are actively adding to their positions.
Yesterday, it was mentioned that the DCE issued a new notice, raising the margin ratio from 8% to 10%.
This was also mentioned yesterday. This move was basically intended to cool the market and prevent excessive short-selling. But it takes effect on Tuesday, that is, on the 27th, while today's market performance showed rising open interest and a sharp drop. What does that indicate?
This suggests that the shorts are not taking profits and exiting, but adding to their positions before costs rise. It also shows that they are confident that the pressure ahead will be greater.
As for the spot market, it is already showing signs of bottoming out.
Or rather, the current market conditions have already defied everyone's expectations, and there is little room for further downside. As a result, the spot market is instead showing signs of stabilizing.
So the spot and futures markets are showing a rapid narrowing of the basis.
For example, taking Henan as an example, the spot basis against 2701 recovered from -470 to -255; in Jiangsu, Sichuan, and other regions, it also largely recovered by more than 300.
The decline in spot prices was halted because people “couldn’t bear to sell,” while the futures decline reflected the reality that they “had to sell.” One is psychological; the other is objective.
But this also shows precisely that market sentiment is not just generally weak. Almost no one in the entire market believes things can turn around in the fourth quarter.
So it is no surprise that hog prices have plunged into a trough again.
The overall hog market situation has not changed either: supply is still being pushed back, frozen pork stocks are still weighing on the market, consumption has yet to pick up, and expectations for seasonal meat curing are still being lowered.
Not one of these issues has been resolved.
With that, the general pattern going forward is more or less clear:
Overall, the market will continue to bottom out, with occasional small rebounds in between, followed by further declines and repeated fluctuations. Only when the curing and preserved-meat season truly gets underway might there be a sustained recovery, but it would only be a recovery, not a return to the cost line.