MORNING LIVESTOCK REPORT

LEAN HOGS

The down trend in lean hog futures continued on Monday led by the Dec and Feb contracts. Buyers continue to position in the Apr through Dec of 2008 contracts, mostly through bear spreads. Technically, futures are severely oversold, but there's no indication of a major upward correction at this time. Fundamentally, record large production continues to weigh on prices daily with packers able to purchase inventory on soft bids without any problem. Pork packer processing margins actually improved yesterday with cash lower and cutout higher. As the dollar declines to record low levels and as cutout values decline to 19 month lows, I can easily build a friendly case built upon demand and usage, but futures will not bottom until numbers taper off. Last week's kill was larger than I expected. For now, one must assume the down trend will remain in force until the next downside target is reached. Monday's slaughter reached a new daily high at 427,000. The cutout was up .54 at 57.85. Strength in the processing cuts out performed weakness in the retail pork cuts. Look for additional cash weakness today. My opening call is steady to lower. Open interest in hog futures was up 1,593.

LIVE CATTLE

Live cattle futures opened unchanged on Monday but rallied sharply and closed on their session highs. Suddenly the Dec live cattle are trading 200 points off the recent lows. In late Oct, when futures put in a short term low, the market recovered 270 points before resuming the down trend. I'm expecting the down trend in live cattle to remain in place. My hedge customers are using this strength to establish short positions. My spec customers are also starting to come to the short side. Anticipate strong resistance in the 9600 to 9650 level basis the Dec live cattle. The rally was based upon two items, the higher wholesale beef as reported at noon yesterday and talk that cash steer prices would trade higher this week. I don't like either argument as valid fundamental reasons for the market to suddenly develop and blossom into an uptrend. First, the cash did not trade higher but steady to slightly lower last week. I see no economic reason for the packer to suddenly change their habit and turn the cash bids strong. Second, the wholesale beef was indeed higher, slightly improving lousy packer margins. However, the strength is coming from less beef entering the pipeline than from strong demand for the product. Monday's kill came in below expectations at just 122,000 and last Saturday's kill was revised downward by 15,000. It appears that beef packers, in response to very poor margins, are cutting back on the chain speed. Rarely does this result in higher cash prices paid. I recommend establishing short positions. My opening call is steady to down 25.

If you have questions or comments, please contact me at 1.877.377.7905 or dennis.smith@archerfinancials.com.

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