by Bob Short, PFGBEST

1-800-280-4566

rshort@PFGBEST.com 

Feb. 3, 2012 at 9:15 a.m. Central:

Hogs:

Pork packers have cut kills the last two weeks to help support product and help their very bad operating margins (last Thursday’s negative $16.58 was the worst in over a year!)

We did lose a small 32 cents last night, but for the week we are up $1.67 (last year up 91 cents). Traders decided to jump on the product strength and we went home last night with April hogs up 238 points for the first four days of this week.  We have stopped April at the 50% retracement area from the mid-October high to mid-December low; it usually takes a few days for traders to consider a bar chart area of this strength to decide to push to new highs or take profits.

Pork brokers are undecided on next week’s product direction. The belly market should continue higher and possibly the ham market (Easter business), but loins and butts are lagging. History tells us April futures usually make their monthly highs next week as traders start to focus on early southern state beef grilling business at the expense of pork.

The only bullish argument for next week will be the less than normal April premium basis (+175) and the fact that product volume on this week’s up money has stayed relatively good. Volume for the first four days of 376 loads is down 8% from last week, but 49% more than this same week last year.

We should be looking to sell April hog futures in the 9050 to 9200 area should the market rally early next week. Traders will look ahead and anticipate late-month product weakness. There is a good possibility that today’s early high of 9040 is the high for the month, but with decent daily volume we will wait into next week for initiating a short position.

We are short three units of April hogs against June and missed adding a fourth unit yesterday.

We are long two units of June hogs against June cattle and have been since the last time Hell froze over and we are still waiting for the outcome.

Cattle:

Cattle futures closed 30 to 50 lower yesterday as traders overlooked Midwest snow and southern plains rain (muddy feedlots next week) as their attention turned to weekly beef export sales. Beef exports for the last full week in January were a very light 4,100 metric tons. This goes against a 4-week average of 14,167 metric tons and for the year-to-date, exports are down over 5% from last year’s pace. Most traders are not interested in the short side of cattle in January and February as they know cash cattle have a strong seasonal advance into April.

Traders know that January and February are always “buy the bad news” months. In addition, the prospect of producing 4.6% less beef this year from last has traders pushing back-month cattle futures to new contract highs the last several weeks.

Keeping traders honest is the ever-present worry that high-priced retail beef will limit domestic usage meaning that if exports falter, we may have a problem. Yesterday’s light weekly export sales played on this worry giving us the 30 to 50 lower market.

February could be a very quiet month for cattle futures. Worries on domestic and export business has kept a large premium basis from being put into present prices and this is price supportive going forward. On the other hand, packer operating margins are close to historic negative levels forcing packers to try and buy cash cattle at lower prices and box beef is more than 6% lower than the end of December (pork was the main January retail feature.)

We should continue to look to buying April cattle futures on corrections the middle two weeks of February. This is nothing more than trading the normal February psychology of buying negative news. The 5-year average is for April to close 133 points higher for the month.

We are short two units of June cattle against long June hogs and are growing old waiting for this spread to go somewhere/anywhere. Let’s keep our liquidation at June cattle trading 3030 over June hogs for more than one hour. I’ve never seen a cattle-hog spread going nowhere for such a long time.

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