MORNING LIVESTOCK REPORT Wednesday December 3, 2008
LEAN HOGS
Hog futures closed mixed to mostly lower on Tuesday. The board appears to be slipping away from the recent highs. Prices rallied last week in light volume, holiday type trade with buying largely sponsored by trend following fund accounts. While the technical pattern is fairly impressive, the charts don't take into account the substantial premium to cash which lean hog futures currently hold. I've never seen a chart pattern or technical package that takes into account the basis. The fact is; futures have already factored in a substantial rally in the cash hog market which appears to be slow in developing. Dec futures are 420 points over the CME lean hog index and the contract goes off the board one week from Friday. Feb futures are trading 700 over the Dec and thus 1100 over the cash index. The board is "all jacked up" due to expectations for production to drop off into the first quarter. However, demand is also expected to drop off especially in the export sector. The fact that crude oil prices closed Tuesday at their lowest levels since May of 2005 is bad news for pork export business. The pork export boom this year was largely sponsored by record high crude oil prices and resulting revenues to large import customers such as Russia and Mexico. Seasonally, ham prices are due to top out any time and business in the processing cuts appears to be very slow. The pork cutout was up .21 yesterday at 59.64. The slaughter pace remains large. If cash hog prices are "only steady today and not higher" I expect futures to stumble and close lower. A close in the Feb below 6410 would strongly suggest a top is in place.
LIVE CATTLE
Live cattle futures worked lower during the course of Tuesday's session with the market displaying a "dead cat bounce" as expected in yesterday's commentary. The board continues to dial in bearish expectations of lower to sharply lower cash steer prices for the remainder of this month. The bearish attitude is being fueled by widespread expectations of poor beef demand in the middle of a major U.S. recession. Indeed, it appears that current beef demand is turning sluggish with the cutout down .38 yesterday at 151.41. I'm starting to hear talk of packer cutbacks in the kills in an attempt to clean up the product and improve current poor processing margins. That's not good news given the fact that we've just moved through the tightest numbers of the season and show list numbers are expected to increase slightly in the coming weeks. My next downside target is 8200 on the weekly chart (Dec futures). My opening call is lower.
If you're considering opening an account to trade livestock and/or grains give me a call or send an email at dennis.smith@archerfinancials.com or 1.877.377.7905.
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