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330309

Supply demand for live cattle to turn bullish; decline in lean hogs positive fundamental factor

Live cattle: Supply fundamentals turn bullish in the fourth quarter.

October and especially December Live Cattle are trading at a stiff premium to the August contract, and rightfully so. Third quarter beef production is expected to be up 2.1% from last year, but fourth quarter production is expected to be down 5.8%. This sets the stage for a more bullish supply tone for the fourth quarter. Lower grain prices and the potential for better pasture conditions could tighten fourth quarter production further. 

The shift in production from the third to fourth quarters should be a positive influence for the October and December contracts. The USDA is forecasting beef production to fall 430 million pounds in the fourth quarter, compared with an increase of 127 million pounds for the same period last year. This will be the largest decline since 2008. 

The oversold technical condition, the discount of August cattle to the cash market, and some relief from the bearishness of outside market forces are all factors that could support the market short term. August Cattle closed moderately higher yesterday with an inside trading session. 

The discount of futures to the cash market, along with ideas that weights will come down significantly due to current hot temperatures lent support. Cash cattle is quiet this week, but the recent strength in the beef market might help stabilize the market. On Wednesday there were 480 head reported in Iowa/Minnesota at $148-$150 with an average price of $149. This was up from an average of $148.41 last week but not enough volume for an adequate test of the market. The USDA boxed beef cutout was up $3.58 at mid-session yesterday and closed $3.39 higher at $268.05. This was up from $264.88 the previous week. The USDA estimated cattle slaughter came in at 126,000 head yesterday. This brings the total so far for this holiday-shortened week to 254,000 head, down from 375,000 last week but up from 253,000 a year ago.

MARKET IDEAS

Supply fundamentals look positive for the fourth quarter, and August is trading at a discount to cash. August cattle support is at 134.10 and 133.80, with resistance at 135.87 and 137.27. October cattle support is at 139.15 and 138.75, with 141.70 and 143.07 as resistance. December cattle support is at 144.50 and 144.02, with 147.20 and 148.20 as resistance.

Lean hogs: Drop in production from the second to the third quarters supportive.

August hogs gapped above the 50-day moving average on the opening yesterday and closed sharply higher on the day. The market traded to its highest level since June 22, which is impressive technical action. A surge higher in the pork product market this week plus the drop in average weights lent support. The USDA pork cutout, released after the close yesterday, came in at $109.76, down $3.06 from Tuesday but up from $106.56 the previous week. The CME Lean Hog Index as of July 4 came in at $110.58, down from $110.70 the previous session but up from $110.45 the previous week. The average hog weight for Iowa-Southern Minnesota as of July 2 was 279.1 pounds, down from 280.6 the previous week but up from 276.6 a year ago. 

The USDA estimated hog slaughter came in at 476,000 head yesterday. This brings the total so far for this holiday-shortened week to 931,000 head, down from 1.374 million last week and 934,000 a year ago. U.S. pork production normally increases 50 to 200 million pounds from the second quarter to the third quarters, but this year it is expected to be down 115 million pounds. This is the second biggest decline on record and is a factor that may dilute the normal late-summer doldrums in pork values. 

MARKET IDEAS

The outlook for a decline in production from the second to the third quarters is a positive fundamental factor. The market's technical action is impressive and suggests at least a short-term low may be in place. October Hog support is at 90.47, with 93.82 and 95.47 as resistance. August Hog support is at 107.40, with 111.15 and 114.10 as near-term resistance.
  

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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 of 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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