by Bob Short, PFGBEST

1-800-280-4566

rshort@PFGBEST.com 

Feb. 10, 2012 at 9:55 a.m. Central:

Hogs:

April hog futures closed 70 higher yesterday and slightly above their daily range. Their early rally to 9930 went through a very strong bar chart downtrend line and a 100-day moving average. This technical area is usually strong enough to give us several days of correction.

Pork fundamentals, however, are starting to turn soft as pork product is now looking for a home. The pork belly market has just had a 20-cent rally for our normal retailer bacon features in February. The pork loin market is 10 cents/lb. cheaper than last year, but daily volume is lacking. The only pork item that is in good shape is the ham market for upcoming Easter business.

There is normally a shift in psychology in the second or third week of February as traders start to worry about the normal seasonal increase in hog harvest from now into April. At the same time they worry that pork demand suffers as retailers turn to pre-booking beef for the upcoming early grilling season in southern states. This lack of buying will always find April futures at a discount to the lean hog index by the first or second week of March.

We have added 110 points to the April basis premium this week and went home last night 195 over the 8770 index. Pork packers are still operating with negative operating margins and should show little appetite to pay up for cash hogs the next several weeks. This will help to keep the lean index from advancing into late February.

We looked to sell April hog futures in the 9000 to 9150 area yesterday; the futures did get to 9012 around 11:45 a.m. yesterday, so those following that objective are short April from slightly above 9000.

We are short three units of April hog futures against long June hogs and are waiting for April to close more than 1000 under June to add a fourth unit.

We are long two units of June hog futures against short June cattle with little to show for this 4- week trade. We stay for the time being.

Cattle:

Beef packers have been cutting weekly harvest levels the last several weeks to try and put a floor under boxed beef prices and thereby helping to stem the flow of red ink. Last week’s harvest of 589,000 was one of the lightest in the last seven years. This very light weekly harvest has been instrumental in packers being able to put $3.20 on choice beef for the week and a rather large $4.24 on select. The problem is that weekly reported box beef volume is slowing quickly on the cash advance. For the first four days of this week we have 863 report loads and this is down almost 9% from last week, 15.6% less than last year and 23.8% under this same week in 2010. In other words, it’s still tough to sell beef on higher money.

Be that as it may, we are still entering the strongest psychological time period for beef. Traders know lighter weekly harvest levels usually decline into April, while at the same time retailers pick-up the pre-booking of middle meats for upcoming grilling season business. This combination usually finds the cash cattle market advancing 12% to 15% from their late August lows of $114. This would put cash cattle in the $128 to $131 area by late March or early April. April futures went home last night with a close of $128.20, or slightly in the low end of this price range.

Beef export sales for the week ending February 2 came in at 22,330 metric ton, almost 53% over the 4-week average; so, early 2012 beef sales are running almost 2% over last year. This coupled with current USDA projections of 4.6% less beef being produced this year will put a floor under any upcoming breaks.

The only problem for the last half of February will be outside markets. We don’t want to see a major stock indices selloff on European debt concerns.

We are looking to establish a long position in April fat cattle futures in the $125 to $126.50 area – hopefully next week. We are short two units of June cattle against long June hogs for over a month, a position that is about breakven. We should exit 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.