Thursday, June 20, 2013

Hogs in the meat of rally, while cattle presses higher

By Rich Nelson

Hogs: At one point Wednesday, July lean hog futures pushed to 2.62 higher for the day. Some people may want to forget that the settlement was 1.35 from those highs. There was a lot of hope that Tuesday's 2.61 gain in the pork cutout would mean another push to new highs for cash hogs.

The trade is still pretty bulled up about these tight hog supplies, running equal with last year, and the likelihood another four weeks would be seen until the seasonal low in hog kill is seen. You can also point out end users are likely finalizing their July 4th purchases. They are typically buying for three weeks out. For the “right now” time frame, this market is still in the red hot phase of this rally.

Again, though, while we are not selling this market yet, we certainly would suggest this market is nearing its peak. We wonder how well the pork market will react to next week’s temperatures in the 90s and forecasts for those to remain into the week after that. Almost the entire country will see above-normal temperatures in that second week forecast. July is typically a step down in meat demand in the first place due to hotter conditions. This forecast, suggested even worse than normal, is something we cannot ignore.

While 90% of traders right now are all-out bullish, helped by outside money’s very big hopes over potential exports from Smithfield, we just cannot beat that drum. We are not taking action on the October cattle/October hog spread. This is not trade that takes a big stand against summer hogs. Remember, October and December futures typically do not enjoy the last leg up of summer hog rallies…Rich Nelson

Cattle: There was no change in beef fundamentals seen that would justify Wednesday's rebound in live cattle futures. August closed up $1.25 while October posted a $1.27 gain. Wholesale boxed beef fell $1.46 for choice and $0.11 for select on the morning report.

Packers will be hard negotiators for this week’s showlists. Bids were posted at a very low $116 compared with $119 asking prices. Either this week or next will likely have the largest kill of the year. Instead, we would attribute the day’s gains to the overall agriculture rally. July hogs were up as much as $2.62 at one point Wednesday morning before they set back.

For the short term issues in the beef market, for the next two to four weeks, we cannot find much good news. Cash cattle typically continues lower into July despite the slightly smaller supply here. Consumers will be set for 90-degree temperatures next week and the current two-week forecast calls for higher than normal temperatures.

Having said this negative news, we must point out this rebound in futures does fit right in with our comments from last week. Mid-June is typically the bottom for August and October futures (not cash cattle). For overall positions, we are still bears on cash beef and cash cattle into July. For futures, we just don’t like the seasonal trade of buy August futures. There will be a few extra head being marketed this year in late summer. We do like the seasonal trade of buying October live cattle.

Friday’s Cold Storage report may convince us to change beef demand estimates. You may remember last month’s Cold Storage report told us the bad U.S. consumer demand was ending. Friday’s report could make that two months in a row. We are bullish in cattle for the long term and like any contract from October on out. For speculative trading our order to buy Oct at 122.00 was not filled, that will be moved higher…Rich Nelson

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