MORNING LIVESTOCK REPORT Wednesday October 21, 2009
LEAN HOGS
Cash hog prices were sharply higher yesterday and lean hog futures closed sharply lower. It's not clear why a packer out west was willing to spend more for live hogs on Tuesday nor is it clear how many head were traded at higher money. Nevertheless, the interior cash was quoted sharply higher with the cash market called fully steady for today. Futures took a dump on what was described as fund selling. Talk circulated among the trade that hams have topped (see yesterday's comment) and sure enough the pork cutout was quoted down 1.24 on general weakness in hams, bellies and loins. I can't explain the disparity between the cash strength and weakness in the product and futures. Always keep in mind that we're trading hogs for December delivery, regardless of current cash conditions. I'm very reluctant to mention this factor, but the headlines from the H1N1 could develop into a problem. Schools across the nation are reporting large outbreaks of students with flu like systems with some schools closing. We knew this was likely to happen at some point during the flu season but it appears to be happening very quickly through the school systems. For producers who are not short the board, my only recommendation is purchasing some price floor insurance by securing some Dec out-of-the money puts. We're short Dec futures from a spec trader standpoint and are now moving our buy stops down to break even given yesterday's close below the 100-day moving average. I'm expecting another round of selling today.
LIVE CATTLE
Live cattle futures closed flat to lower on Tuesday but action in the electronic trading turned back to higher levels late yesterday as news spread of higher cash steer trading activity. We've commented that we're currently experiencing the tightest fed cattle supply of the year and packers are paying up to get cattle. Reports circulated late yesterday that packers in the south paid as high as 84.5 (up .50 to 1.00) for cattle and packers in the north paid 85 on the live and as high as $132 for the hot beef which is substantially higher (up $5.00) from last week. Packer margins have improved lately with the beef higher for 7 out of the last 8 days. Cattle futures are trying to "change their stripes" from a sustained down trend into a new uptrend. I'm using current strength to hedge production. My strategy is by using put spreads for production through year end by using the Dec options (leaving the upside open) and by selling futures in the Feb-Jun or using option strategies in the Feb-Jun timeframe. We actually should be approaching the end of the tight supply (in three to four weeks) situation and I'm not expecting a major surge in cattle futures prices. The deliveries keep coming with 16 new tenders and 74 retendered. A new stopped has appeared with the oldest long partly through 10/12.
If you need help in developing and executing a hedging strategy give me a call or send me an email to dennis.smith@archerfinancials.com or 1.877.377.7905.
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