Sort & Cull

Sometimes I find it helpful to think of the market as a large mental hospital, one filled with a great variety of disturbed individuals who are desperately trying to cope with whatever the future may hold.

Some patients/traders have disorders of extreme optimism while others suffer from manic pessimism. Yet most of the inmates (including a good number of white-coated therapists) just show paralyzing symptoms of old-fashioned confusion.

Imagine a crowded therapy session called "Early Summer Meat Trauma." There's a large circle of chairs filled with delusional bull spreaders, paranoid bear spreaders, noncommericials in denial, and angst-ridden producers.

Besides all being lost in the psychological storm engulfing June live cattle and lean hog futures, the only thing shared by these anxious maniacs is a close clock-watch for the next round of meds.

Now I'm sure many of you don't see this spring's strange crop of extreme cattle discounts and shaky hog premiums in such "one-flew-over-the-cuckoo's-nest" terms. Yet there can hardly be a single market-watcher in the CME grandstand who's not struggling to find a way to frame and understand current price expectations for the summer ahead.

On one hand, the enormous discount of June live cattle to spot April and feedlot cash is simply historic in size. While it would certainly be a dereliction of seasonal duty for June live not to anticipate (i.e., mindful of both larger early summer fed supplies and the backside of peak second quarter beef demand) some price break from the spring high, the implosion immediately before us (spot April live expires on Monday) makes Marianna Trench look like a sand pit.

Discounts in summer contracts to spot April live currently extends between $18 and $19, representing the most bearish spread seen in more than five years. When spot cash are thrown into the bizarre picture, the June rollback is more than $20. Finally, the early summer contracts closed today near 25 below the cash high of late February.

On the other hand, the increasingly puny premium of the June lean hog contract has become historically modest. Just as June live cattle are typical true to a seasonal logic in fundamentals, June lean hogs should normally point to higher price action ahead (i.e., the reasonable implication of tightening numbers of finished barrows and gilts from early spring to midsummer, as well as generally improving red meat demand through the same period).

In other words, market eyes are not straining thanks to the June hog premium per se. Rather, many peepers are crossing because the current premium is just not very large compared with the average summer staging. This seems especially true vis-a-vis deferred lean issues.

For example, June lean typically trades as much as $16 over the October contract at this time of year. Yet the early summer premium over early fall is currently just a little over $8. From another angle, June futures are currently trading nearly $13 under their contract high set back in early January.

The board's extreme discount in cattle and unusually modest premium in hogs would seem to stem from the same perceived reality. Both cattle and hog traders are anticipating very high levels of red meat production versus the summer of 2017 (i.e., April-June beef up 4%; April-June pork up 4.5%), but no one seems to know how much price protection is prudent.

Maybe these strange looking spreads are a simple function of the old adage "when in doubt, error on the side of caution".

While I understand such nervousness in the face of such a tall supply wall and uncertain demand, my guess is that "market shrinks" will ultimately diagnose one camp a bit nuttier than the other. In short, either June hog premiums will be exposed as too small or June cattle discounts will be revealed as too large.

For what it's worth, I'm betting that the latter will be closer to the truth than the former. From this couch, cattle discounts strike me as more irrationally extreme than hog premiums seem insanely small.

But who do I think I am, Sigmund Freud?

For more from John see www.feelofthemarket.com

(CZ)

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