Allendale Livestock Wrap-Up for 2/3/2010
Hogs: As noted before, it appears this market feels comfortable with this price level for pork. It has priced in what it feels is a reasonable discount due to the Russian ban on U.S. chicken. Now, the “new news” is the trade may be seeing identifiable problems due to this corn quality issue. Low quality feed can affect weight gains, finishing dates, and general health. One pork producing client of ours at our January conference told us clearly his hogs simply stopped eating when they blended a little too much of the bad stuff in. This story will help moderate some of the bearishness from the chicken issue. It will not overcome it. Last night we also noted that we were moderating our bearish position to one of neutral. One technical sign we had been watching was declining open interest in the past couple of weeks (long liquidation). Yesterday’s liquidation only totaled 167contracts. When the sellers that were pushing this market stop selling, we must become neutral. Now, having made all of these points we will note something important here. Yesterday, the pork cutout jumped by $1.88; today it dropped by $1.87! Futures will be lower this morning. For now, we will expect to see a retest of the 66¢ level on the April contract. Will this change the trade psychology back to bearish? For now, we don’t think so.
Cattle: The system running over Texas is pretty good sized. It appears the heaviest of the rains are in the panhandle, right where the key feedlots are. Throw a little mud around the lots then some snow Sunday and Monday and there could be some weight gain problems. Futures will likely respect this system through Monday (by not letting April fall below the 88.50 - 88.75 area. Bears have arguments here too. Beef packers are complaining of negative margins. Whether feedlots have fewer cattle to offer or not does not make a difference when the buyer is trying to buy less. Also, we have a big monthly jobs report directly in front of us (Friday morning). It is unlikely any cash cattle trading would be seen in the Kansas through Texas trading areas until then.
Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com