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Steep slide for livestock markets-Bryan Doherty

Livestock markets have been on a steep slide since peaking in early April. June cattle reached a top on April 4 at $121.50, and traded as low as $100.75. The June lean hog prices peaked on April 1 at $104.35, and recently bottomed at a low of $86.92. That's a change of near 16% in cattle and just under 15% for hogs. July corn futures recently bottomed at $6.59 and are now trading over $7.60 for a change of over $1.00, or a 15% increase. These changes have most cow-calf and feedlot operators in the red. Hog producers are also showing losses. This is not a good directional trend, as the market now has to contend with the reality that liquidation is likely underway. Livestock operators will keep their animals close to the knife. 

Ultimately the pullback in cattle and hog prices could spur demand. Higher energy prices and unemployment figures (holding at 9% or higher) suggest demand is not likely to increase soon. Worries that world economic conditions are beginning to slow and thoughts that the U.S. dollar may have bottomed are also viewed as negative. In the end, there just doesn't appear to be much of a friendly demand picture for livestock. Producer losses will mount and supplies will likely again tighten. When outside influences become more positive, a rally for livestock will ensue. 

If in the long run there is less inventory and friendlier prices, then why are prices defensive? As we discussed in our report earlier in the year, it's one thing to have perceived demand and expectations for high prices, as was experienced with deferred futures contracts. It's another to have high demand at high prices. It appears that, earlier in the year for both cattle and hogs, the futures market overdid it to the top side. Operating on the premise that export demand would remain red hot and feed prices would ultimately work lower, we now see that these assumptions have not actually occurred. 

While the near-term picture looks bleak, livestock prices have corrected enough that consumer demand may improve. The other positive is that, while demand may be slowing on the world front based on concerns that world economic conditions are slowing, the reality is that world markets continue to show improvement. Ultimately, consumers will continue to look toward meat products as a source for their diet. In addition, while there are planting uncertainties in row crops this spring, history has a tendency to be kind to corn and bean producers with good weather in June and July. If that's the case this year, grain prices could be peaking sooner than later. 

If you have questions or comments please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.

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