DTN Early Word Livestock Comments

Strong Cash to Support Futures

Robin Schmahl
By  Robin Schmahl , DTN Contributing Analyst

Cattle: Steady Futures: Higher Live Equiv: $240.80 -1.63*

Hogs: Steady Futures: Higher Lean Equiv: $129.23 -6.17**

* based on formula estimating live cattle equivalent of gross packer revenue.

(The Live Cattle Equiv. Index has been updated to depict recent changes in live cattle weights and grading percentages.)

** based on formula estimating lean hog equivalent of gross packer revenue

GENERAL COMMENTS:

The market can be full of surprises and the price action so far this week for cattle certainly is a surprise. Not so much in the fact that cash cattle did not trade lower, but that they actually traded as much as $4.00 higher in the North and up to $2.00 higher in the South. Packers have enjoyed very good profit margins for some time and even through boxed beef prices seem to have established a top, they need cattle and paying more to get them still leaves exceptional profits. Paying up as much as they have does not seem to indicate that they are raising bids because they are being nice, but it seems to be more of a necessity to procure needed supply. A decrease in weights and the possibility that demand may remain stronger than usual during this time of year is a positive development. Boxed beef price took a large hit Tuesday with choice cuts down $1.04 and select cuts down $5.13. This may actually spur greater demand as less expensive beef may increase consumer interest.

The coin seems to have flipped between cattle and hogs as far as futures contracts are concerned. Hog futures have been under pressure the past three days. Only the July contract was able to close higher as it attempts to anticipate cash. The National Direct Afternoon report showed a huge increase of $5.83 as packers came back looking for hogs aggressively. This is interesting due to the large drop in cutouts of $6.17 Tuesday. The overall posture of the market has not changed over the past week, but futures needed to correct and liquidation gripped the market, stops were triggered, and technical support levels violated. Fund liquidation generally runs its course in three days, so a price bounce is possible.

BULL SIDE BEAR SIDE
1) New contract highs were made in October and later cattle contracts solidifying a solid uptrend. The market anticipates quite a bit higher cash into next year. 1) Boxed beef prices have taken a significant hit and may likely decline further. This may limit the potential of cash.
2) Strong cash will provide solid support and lower grain prices will provide feedlots with more leverage. 2) Three days of aggressive short-covering may have run its course with the potential of a price retracement Wednesday.
3)

A three-day liquidation phase has taken place in hog futures. This was sufficient to correct an overbought market, which might generate buying interest from traders.

3) July hogs came close to closing the chart gap at $116.85 but did not accomplish it. Technical traders may not turn aggressive buyers unless the gap is closed.
4) A jump in cash and tight supplies may make this decline in hog futures temporary. 4)

Substantial price weakness of cutouts is not a good sign as current supply may have saturated the market for the time being..

**

For our next livestock update, please visit our Midday Livestock comments between 11 a.m. and noon CDT. Also, stay tuned to our Quick Takes throughout the day for periodic updates on the futures markets.

Robin Schmahl can be reached at rschmahl@agdairy.com

Robin Schmahl