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Cattle futures market seen as overbought, analyst says

The USDA estimated cattle slaughter came in at 121,000 head yesterday.

The short-term trend for live cattle futures remains up, with traders seeing support from a firm cash market this week and from average weights that are still well under last year and under the five-year average.

However, February Live Cattle futures prices are still trading near a $15 premium to the cash market vs. a typical premium of $7. The reason for the big premium is still difficult to ascertain, as fourth quarter production looks to come in nearly 20 million pounds above the third quarter. Normally, production declines by 200 million pounds for the quarter. Fourth quarter production is expected to decline from a year ago, but the decline is less than 1%. Furthermore, the decline from the fourth quarter to the first quarter is forecast to be the second-smallest decline for that period in the last 20 years. This would suggest a smaller-than-normal premium, not a larger one. 

For the USDA Cattle on Feed report Friday, the average trade expectation for September placements is 101.4% of last year, with expectations ranging from 97.5% to 104%. Marketings are expected to come in near 97.5% of last year (97%-98.9% range). Cattle-on-Feed for October 1 is expected to be near 99.4% (98.6%-100% range). 

Technical indicators such as stochastics are signaling an overbought status with the futures holding that a huge premium to the cash market, which could limit new buying. Traders are also concerned that consumer sentiment could turn weak as spendable income is being pinched by energy and food inflation. This could reduce demand for higher-priced beef cuts. 

The USDA estimated cattle slaughter came in at 121,000 head yesterday. This brings the total for the week to 362,000 head, up from 361,000 last week and 361,000 a year ago. The USDA boxed beef cutout was down 37¢ at midsession yesterday and closed 85¢ lower at $280.03. This was up from $280.02 the previous week. Cash cattle were firmer yesterday on decent volume. The five-area weighted average cash cattle price as of Wednesday afternoon was $124.28, up from $123.86 a week ago, a gain of 42¢. 


The decline in open interest on the rally from the October 1 low suggests a weak foundation for the current minor uptrend. With the overbought condition and the premium of futures to the cash market, traders might watch for a technical sign of a near term top. December Cattle resistance is at $131.62, with some support at $130.07. Better support is seen at $128.80 and $128.07. February Cattle resistance is at $136.40, with support back at $133.85. Consider selling the December Cattle $132.00 call near $190. 

Lean Hogs 

Will need to see stable pork cutout values for a low in hogs.

After a decent rally yesterday, lean hogs closed sharply lower on the session and at their lowest level since September 24. Short-term weakness in cash markets, the lowest pork values since March, and news of increasing weights (well above the five-year average and even above last year) pressured the futures. The market is technically oversold, but the COT report shows a hefty net long position for fund traders, which indicates the market is vulnerable to long liquidation. The CME Lean Hog Index as of October 18 was 86.63, down from 86.88 the previous session and 90.94 a week before. This leaves December hogs trading at a discount of $10.38 vs. a five-year average of $6.22 for this time of the year. China imported only 19,179 tonnes of US pork in September, down 65% from last year. 

The USDA pork cutout, released after the close yesterday, came in at $95.45, down from $97.31 on Tuesday and $103.07 the previous week. This was the lowest the cutout had been since March 8. The average hog weight for Iowa-Southern Minnesota as of October 16 was 287.1 pounds, up from 285.8 pounds the previous week and 285.1 a year ago. The USDA estimated hog slaughter came in at 478,000 head yesterday. This brings the total for the week to 1.428 million head, up from 1.427 million last week but down from 1.460 million a year ago. 

MARKET IDEAS: The technical action is still bearish, and the cash fundamental news is also negative. Resistance for December Hogs comes in at 77.20 and 78.47, with 74.35 and 73.05 as next support. February Hog resistance is at 80.00 and 81.05, with 77.25 and 76.45 as next support. 


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*** 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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