DTN Early Word Livestock Comments

Cattle: Steady Futures: Lower Live Equiv: $274.24 +$0.24*

Hogs: Higher Futures: Higher Lean Equiv: $123.36 +$1.08**

*Based on the formula estimating live cattle equivalent of gross packer revenue. (The Live Cattle Equiv. The 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:

It was certain that at some point cash cattle would trade lower. It was also certain that at some point, cattle futures would see limit moves. The CME had increased the trading limits of cattle some weeks ago, and those were reached on Friday. It was anticipated that if limit prices movement would be seen, it would be to the downside as it was unlikely bullish news would be sufficient to test the upside limits. Feeder cattle futures were locked limit down in August through May contracts, with live cattle limit down in the October contract. The result is that expanded limits are in effect today. The trading limit for live cattle is $10.75 and $13.75 for feeder cattle. Follow-through weakness is expected, as those who could not get out of their long positions may try to liquidate today. However, even with the large losses on Friday, cattle futures still closed higher for the week. Lower cash cattle trade triggered the weakness. Southern live cattle traded $0.50 lower, with Northern dressed cattle down $4.00. Boxed beef prices took a breather with choice down $0.10 and select up $1.34. The Commitment of Traders report showed fund traders as net sellers of 3,479 futures contracts in live cattle, reducing their longs to 121,467. Funds were net buyers of 1,939 contracts in feeder cattle, increasing their long position to 35,979.

Hog futures closed mixed as traders stared in awe at the pressure on cattle, with some dread that spillover pressure may find its way into the hog market. There certainly was cause for pressure itself as packers were not aggressive on Friday. The National Direct Afternoon Hog report showed cash down $4.49. The weighted average declined to $106.73 and $2.00 below the August futures contract. Thursday will be the last trading day for August, with October taking over as the front month. Pork cutouts gained $1.08. Packers may take advantage of the lower cash price on Friday and step in to purchase hogs early this week. This could result in a rebound in cash prices. The Commitment of Traders report showed fund traders reducing their long position by 624 contracts to a net long of 104,129.

	BULL SIDE		BEAR SIDE
1)	The substantial pressure on cattle futures on Friday seems to have been overdone relative to the weakness of cash. This may be viewed as a buying opportunity.	1)	Further pressure may be seen on cattle futures as follow-through liquidation may continue.
2)	The cattle supply remains tight, and that will not change anytime soon. Consumers want beef and are willing to pay for it.	2)	Packers will want to pay less for cattle again this week and hope that further pressure on futures will increase the selling interest of feedlots.
3)	Hogs withstood spillover pressure from cattle due to the market not being overbought and traders seeing limited downside potential.	3)	Further weakness of cash hogs will keep deferred hog futures holding the large discount they have to the August contract.
4)	Pork cutouts were higher, indicating demand is holding. The October contract holds a large discount to cash.	4)	Hog futures will have a difficult time trending higher under the current market fundamentals. Cash continues to erode.

For our next livestock update, please visit our Midday Livestock comments between 11 a.m. and noon CST. 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

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