by Bob Short, PFGBEST

1-800-280-4566

rshort@PFGBEST.com 

Feb. 8, 2012 at 9:40 a.m. Central:

Hogs:

We put 43 cents on product last night, and for the first two days of this week pork product is up a less than exciting 8 cents. The lean hog index was down 15 for the day and is now down 36 for the week. The index should be down another 80 points by Friday to somewhere around 8680.

We have added 54 points to the April hog basis this week, and it is now at a premium of 139 against a premium of 851 last year and a 2-year average positive premium of 508. We lack much of a premium basis this year, as traders continue to worry exports will not be as high as the USDA has forecast.

The middle two weeks of February are the seasonal time that traders look to sell April futures as they anticipate the cash hog market seasonal decline into April when harvest levels generally increase just as retailer interest shifts to beef. The problem this year is the less-than-normal premium to sell.

We are trying to sell April hog futures in the 9050 to 9200 area this week or next. It is starting to look like the market lacks any conviction that futures should be going higher near term. To continue up, we will need a boost to product prices, but pork brokers see little in the way of pork product strength the rest of this week. Product is just being called “steady” into Friday. We are slightly stuck at the moment on finding direction for hogs near term.

Meanwhile, we are short three units of April hogs against June and waiting for the 1000 area to be broken. We are long two units of June hogs against short June cattle and growing old waiting for this spread to do something.

Cattle:

Occasionally, a day like yesterday shows up in cattle futures. Phones were busy late yesterday with traders trying to find the reason for February cattle closing 160 points higher for the day. The only fundamental beef news yesterday was the noon beef market had choice box beef up 99 cents and select up $1.11. The night wire had choice up $1.02 for the day and $2.56 higher for the week. Select ended $1.04 higher for the day and is up $2.03 for the first two days of this week. While this is a decent boost, the volume continues to struggle. Our 2-day box volume of 380 loads is 6% under last week, 24% under last year and 32% less than 2010. In addition, the beef packer operating margin is still deeply in the red.

February futures closed at $125.35 last night against a $123.00 cash cattle market. This $2.35 basis premium should invite cattle deliveries the next several days. This, in turn, should see old long position holders offsetting positions to keep from taking deliveries. Yesterday saw open interest decline by 3,113 contracts, albeit on sharply higher money.
A market that goes higher on no news is usually a market that will continue to work higher. The last half of February is always a time when traders expect retailer pre-booking of beef for late March-early April southern state grilling season.

We are trying to buy April cattle futures in the $125.50 to $126.50 area and will stay with this technical area for now. Should cash cattle hold steady this week or lose another $1 to $2 (terrible operating margin) we may get the chance.

We are short two units of June cattle against long June hogs. I expected we would have a 200- to 300-point profit by this time and that this would insulate us from the late February seasonal cattle strength. Unfortunately, the $3 higher cash cattle market in January, in spite of terrible box beef prices, has kept us on the defensive. We should liquidate this spread should June cattle trade 3030 over June hogs for more than one hour.

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.