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Basis for cattle could shift from June discount to June premium to cash

The technical chart pattern is quite bearish, but the live cattle market is likely to find at least a short-term low soon. It seems to have the supply fundamentals for the cash market to push higher this month, and the supply fundamentals suggest June Cattle should be trading at a higher-than-normal premium to the cash market instead of the current sharp discount. The jump in beef prices may be enough for the market to forge a low.

The USDA boxed beef cutout was up $5.78 at midsession yesterday and closed $3.49 higher at $271.53. This was up from $264.50 the previous week and was the highest the cutout had been since February 14. Cash live cattle trade has been a bit lower on active trade the first two days this week. The five-area average price on Monday was 138.48 with 21,027 head reported. The average was 138.74 on Tuesday with 16,947 traded. These are both down from 139.22 last week. 

June cattle closed sharply lower yesterday day after a higher opening failed to attract new buying interest. The technical action remains weak, but the fundamental outlook for this quarter is improved from last quarter.

Beef production is expected to decline from the first quarter to the second quarter by nearly 170 million pounds compared with a normal increase of 200 to 400 million pounds. Beef prices are trading higher on the week, and cash markets appear to have stabilized. In addition, June cattle are trading at a discount to the cash market compared with a normal premium of $8.47 for this time of the year.

The USDA estimated cattle slaughter came in at 125,000 head yesterday. This brings the total for the week so far to 246,000 head, up from 244,000 last week and 225,000 a year ago. Bird flu issues affecting eggs and poultry might support better beef demand. For now, however, the loss in exports is about equal to the loss in production. 

Market Ideas for Cattle

The market seems to have the supply fundamentals to push higher over the near-term, and June Cattle may move from a discount to a premium to the cash market. June Cattle support is at 133.07 and 132.40, with resistance at 137.15 and 138.62. August Cattle support is at 134.47, with 138.30 as resistance.

Lean Hogs

Pork values drifting lower, June still higher than normal premium. 

The lean hog market remains under the negative technical influence of the key reversal last week. Weakness in the pork market plus continued weakness in cattle are seen as negative forces. The steep, four-day sell-off leaves the market in a short-term oversold condition. The USDA pork cutout, released after the close yesterday, came in at $102.16, down $2.02 from Monday and down from $102.22 the previous week. June hogs closed sharply lower yesterday after a push higher failed to attract new buying interest. During the session, the market fell to its lowest level since March 8. June Hogs are still trading at a stiff premium to the cash market, so the upside may be somewhat limited. 

The CME Lean Hog Index as of April 1 was $102.41, down from $102.63 the previous session and down from $102.93 a week prior. This leaves June Hogs trading at an $11.94 premium to the cash market compared with a five-year average premium of $8.12. Talk of less poultry production and higher egg prices may have provided some support, but so far, the loss of poultry exports has been the offset. The USDA estimated hog slaughter came in at 480,000 head yesterday. This brings the total for the week so far to 957,000 head, up from 955,000 last week and 815,000 a year ago. 

Market Ideas for Hogs

Traders see the market as a bit oversold after the sharp sell-off from Thursday’s high. Resistance for June Hogs is at 117.97 and 119.75, with 111.92 and 109.15 as support. August Hog resistance is at 115.87, with 108.90 as support.

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About the Author: Terry Roggensack, a founding principal of The Hightower Report, analyzes the livestock, grain and soft markets. Roggensack has over 30 years experience in the commodity and financial futures industry. In the late 1980s, he briefly lived in London as acting director of a new London clearing firm. Prior to that, Roggensack was director of research at Stotler & Company.

Editor’s Note: This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. Any information or recommendation contained herein: (i) is not based on, or tailored to, the commodity interest or cash market positions or other circumstances or characterizations of particular investors or traders; (ii) is not customized or personalized for any such investor or trader; and (iii) does not take into consideration, among other things, risk tolerance, net worth, or available risk capital. Any use or reliance upon the information or recommendations is at the sole discretion and election of the subscriber. The risk of loss in trading futures contracts or commodity options can be substantial, and traders should carefully consider the inherent risks of such trading in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited.

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