We put a big 86 cents on product last night and are now a little more than 12% under year ago wholesale pork prices. Last year we lost 18 cents on Monday and two years ago we managed a 31 cent higher Tuesday product.
July hog futures are back to a 269 premium to the lean hog index (8498) against a 2-year average discount of 101. Two Fridays ago, July had a 655 premium and this too high of a premium has been taken care of over these last two weeks.
Yesterday, traders started selling cattle and buying hogs as June is almost always a good demand period for pork against a bad month for beef. As we know, the June cattle against June hog spread got June cattle to over 3200 premium to June hogs last week when most years we see this spread with cattle 1200 to 1400 over hogs. When traders are not sure what to do they will usually turn to spreads. Coming off a holiday harvest reduction, traders aren’t sure if they should sell (thinking backed-up holiday hogs must now be sold putting pressure on the cash hog market) or if they should go long, expecting the light harvest to put pork product higher thereby supporting cash hogs. This dilemma usually finds a spread as a safer bet. Selling cattle and buying hogs is a natural for the last week of May. This is why we were short cattle against long hogs only to be taken out by a friendly Cattle On Feed and a bearish pork Cold Storage report. Sometime you need a little luck.
At present we have no position in hog futures as I don’t know if product will have its usual seasonal advance into mid-July. Loins and butts are at last year prices and so traders are looking for the cash belly market (24% under last year prices) to carry the pork complex in the near term. We’ll see. The one positive at this time is that oil prices have declined 20% from their late February highs.Gasoline will follow and this should free up consumer dollars for pork in June and July.
August and October hog futures are 300 points over a double bottom on daily bar charts. At this time of year we must assume that these prices will be a bottom. Let’s see what the next few days bring on pork prices and daily volume before looking to trade.
Boxed beef keeps marching higher as we put $1.11 on choice beef yesterday, and at $195.74, choice beef is about 1.5% under yearly highs. Tuesday volume of 171 loads was 20% less than last week, 30% less than last year and almost 33% under Tuesday volume in 2010. It is starting to look like we may be reaching a retailer resistance area in the short term.
This has been anticipated by traders as June cattle futures are now down 253 points from their highs made seven trading days ago. Traders know that June belongs to pork product going higher at the expense of beef working lower as spring/early summer beef grilling business has been pre-booked.
June cattle futures have good daily bar chart trend line support at $116.80 with excellent support in the $114.30 to $114.70 area.
We sold June cattle in the $118 to $120 area and see no immediate need to liquidate the position although we don’t have a big enough lead to add additional units at this time. I am still looking to add to June short positions when boxed beef prices start lower as prices work lower. For now we stay short and do nothing more.
A normal seasonal correction in cash cattle into late July would put cash cattle in the $112 to $115 area from their $123 tops made several weeks ago.
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PFGBEST Research Team