THE LIVESTOCK REPORT by Robert Short

July 5, 2012 in Featured Articles, Livestock by PFG Best

Hogs:

Hog futures closed 2 points lower in July and 10 points lower in August July 3 on light daily volume of 39,000 contracts. Many traders are taking extra days off around the July 4 holiday and making light volume days possible/probable into Monday of next week.

Traders know pork product will be making a sharp, short-term downside correction after going from 20% under last year to 0.5% over last year by Monday 6/25/12. We went home Tuesday with the pork composite index at 9156 or 9.6% under the 6/25/12 high of $101.29. We usually expect a 10% to 15% break in product into the second week of July as holiday business has come to an end.

Six trading days ago, August hog futures were a record 1379 discount to the lean hog index. When traders started to worry that this was out of line, we had a 2-day short-covering rally of 490 points. We are now 650 discount to the index against a 2-year average discount of 412. This is more in line with trader expectations and is not now a point of concern, however it is this discount that usually finds hog futures working higher no later than sometime next week as traders know the lean index usually has a seasonal rally, after this selloff, into mid August.

Most years, the lean index by mid-August will be close to the highs made last week of $103.08. With August hog futures going home Tuesday at 9487 it may be tough to have more than a short-term futures break.

Today and possibly tomorrow, traders will be negative in their thinking as extreme heat makes them worry outdoor grilling has been curtailed in the short term, even through the holiday, and this will limit meat purchase for several weeks during this hot spell.

Wholesale pork product lost a large $5.38 last week and has lost another $3.87 the first two days of this week. Pork loins have had a 18% correction from their $1.67/lb. high made last Friday. Pork butts are almost 8% under last week highs. The biggest thing to remember is that with this rapid downside correction in wholesale pork product, we are seeing daily volume pick up. The USDA data shows 202 loads reported for this Monday and Tuesday and this is 71% over the first 2 days last week and almost 52% reported two day volume 2 weeks ago. There appears to be good retailer support developing for pork product on declining wholesale prices.

If this pattern continues into next week, the downside for this break in hog futures will be limited.

Pork belly prices should be working higher as extreme heat should keep near term BLT season business good.

We talked about getting short August hog futures last week with good technical support in the 9320 to 9350 area and more support in the 9100 to 9225 area as the possible area for a bottom to be made. The daily fundamental news for wholesale pork product will stay defensive into early next week, but I would look to take profits, if you’ve gotten short, in one of the two areas mentioned.

Cattle:

We lost $1.41 on choice beef Tuesday and are now $1.44 lower for the week against being 58 cents higher last year. Choice boxed beef at $193.22 is just 2.8% under yearly highs made in late February. Boxed beef volume remains better than should be expected at this price level in a bad demand month like July, not to mention the additional problem this year of extreme heat limiting any near-term grilling.

Cash cattle remain stuck at $116 in Texas and Kansas with Nebraska staying at $116 to $117.

August futures went home this past Tuesday at $119.47 or a premium of 347 points to $116 cash in the southern planes. This larger-than-normal premium basis has turned trader attention to selling August (heat slows grilling interest) against buying December and back cattle futures thinking exploding corn prices will severely limit feedlot placements going forward. Traders have been expecting this spread to work for the last several weeks, but today looks to be the start of this spread until corn makes a high.

We went short August cattle futures in the $118 to $119.50 area last week with your choice on a protective stop at $120.10 or $122.37. If you are still short continue with the $122.37 exit point.

Floor traders are not interested in the long side of cattle futures at this time as we are into early July on extreme heat limiting outdoor grilling. We can keep a larger-than-normal basis premium in futures to cash cattle as extreme heat will slow or reverse cattle weight gains and limit near-term supplies.

Near-term cattle futures will have a 200- to 300-point correction should daily boxed beef volume start lower on declining wholesale prices. So far, the 2.4% downside price correction in wholesale boxed beef has not seen volume decline. We should start to see lower daily/weekly boxed beef volume no later than next week.

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.

Robert Short
PFGBEST Research Team
rshort@pfgbest.com