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Traders hoping for strong cash rally, but meat supply burdensome, analyst says
Traders seem overly optimistic that cash cattle can trend higher over the near term.
Cattle slaughter over the past two weeks has come in below year-ago levels while the show list this week is smaller, and these factors have traders hoping that cash can trade up. However, with the huge supply of cattle on feedlots forecast for a long time, expecting slaughter to remain under year-ago levels seems unrealistic. Instead, the data suggests that slaughter should begin to come in well above year-ago levels.
Keep in mind that the July 1 supply of cattle that had been on feedlots for 120 days or longer was 4.858 million head, up 16% from last year and up 24% above the five-year average. Weights remain well above last year and the five-year average as well.
Cash live cattle are trading a bit softer this week. In Kansas 5,037 head were reported yesterday at $95-$97.5 and an average price of $96.4, down from $96.75 on Friday but up from $95.73 a week ago. In Texas/Oklahoma, 878 head traded at $95, down from $96 on Friday.
The USDA boxed beef cutout was up 84¢ at midsession yesterday and closed 41¢ higher at $202.96. This was up from $200.88 the previous week and was the highest the cutout had been since July 13. The USDA estimated cattle slaughter came in at 119,000 head yesterday. This brings the total for the week so far to 236,000 head, up from 235,000 last week at this time but down from 239,000 a year ago.
Slaughter has been coming in below last year over the past several weeks, but with the large supply of cattle that have been on feedlots for 120 days or more, traders expect production levels to remain high and for slaughter to begin to push well above last year. October cattle resistance is at 105.85, with support back at 103.15 and then 101.90. Consider selling calls or futures on any bounce.
The hog market has consolidated over the past 14 trading sessions, as better-than-expected demand for pork has clashed with a burdensome short-term supply. If the demand tone eases at all, the market will be vulnerable to increased selling pressures. Uptrend channel support for October hogs is at 49.92 today, and staying above this trend line will help provide technical support. However, sellers could get active if the support is violated. While slaughter and pork production levels remain burdensome, a firm tone to the cash markets and higher pork cutout values have provided underlying support. U.S. pork is considered cheap; the U.S. dollar has fallen significantly in recent weeks, and Mexico has even been a more active buyer of U.S. pork. With U.S. pork production running 8% to 12% above a year ago, the market will need active export news to avoid weakness in pork cutout values ahead.
The CME lean index as of July 24 was 50.23, up from 50.13 the previous session and up from 47.90 a week before. This leaves October hogs near the cash market, which is in contrast to a five-year average basis showing a $16 discount to the cash market.
The USDA pork cutout, released after the close yesterday, came in at $68.81, down $1.70 from Monday and down from $71.95 the previous week. The USDA estimated hog slaughter came in at 475,000 head yesterday. This brings the total for the week so far to 930,000 head, down from 943,000 last week at this time but up from 918,000 a year ago.
October hogs normally trade near a $16 discount to the cash market at this time of the year. As a result, sellers could get more active if pork values begin to seasonally break. Resistance for October hogs is at 51.72 with support at 49.72. A close below support or a close under uptrend channel support at 49.92 today would turn the charts bearish. There is some technical support at 48.62.
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