Hogs: Buy the rumor, and sell the fact. For weeks the market has been speculating on how low this year’s hog kill would be. During this period, the trade moved up its viewpoint on when PED would hit. Initially it was a summer-only thought. Then it moved up to a spring problem. The last phase of this rally, the general perception changed into a March-and-beyond problem. Wednesday morning, our cash hog sources were raising the alarm with a “it is here right now and there are no hogs” alarm. The limit up trade for the first six contracts on the electronic session may have been a signal to us that enough was enough.
We are not saying that the hog market is now bearish, not at all. We still have a completely unknown supply for March all the way out through October. What has changed is likely that the market’s perception of where futures need to go may have changed. Realistically, a $112 April hog is just plain ridiculous. How much more premium over last year do you need? That is 39% over last year!
Thursday we will release our estimates for quarterly cash hog and futures projections. Additionally we will release a breakdown of various production scenarios compared with where futures would be. This way you can break down the current futures action and see if the market is pricing in some unreasonable assumptions. For now, it is time to turn neutral to hog futures. Enough is enough until we actually see PED hit for a few weeks…Rich Nelson
Cattle: Has the worm turned? We started Wednesday with electronic futures for hogs and cattle implying another big rally would be seen. Limit up trade in the first six hog contracts would certainly imply the next place to buy would be cattle. April futures got up to $2.50 higher for the day at one point before closing $1.70 lower. The clear rejection of the early strong price action is seen with many major market tops.
This may have been the big move we have been seeking. Beef fundamentals are still officially supportive. The morning boxed beef report showed a $2 to $3 gain. Cash cattle has not traded lower yet. You could argue that some were disappointed that packer bids were at $148 this morning. While know the next move in live cattle supplies (more) and price (down) the question here is about picking the top. Even without the short-term beef stats turning bearish, Wednesday's trade may have been an important one psychologically.
Keep in mind the smallest kill of the year was posted two weeks ago. Packers will see a few extra cattle show up at the front door going into April. In the later part of April we will see sharp increases steamroll into a bearish position. As noted before, Q1 is the smallest kill of the year. This year’s Q1 will see 5% to 6% lower than last year. Summer is the biggest supply of the year. This year’s summer, due to Sep–Jan placements, will run around 1% higher than previous year. For trading, looking at the 1 minute charts of our spread positions the risk point was just filled on this morning’s higher trade in futures.
While we are still net ahead on the year for cattle trading positions, this Feb/Mar run up has offset most of those incredible gains made in January. We would certainly like to have those short positions on but a risk point is a risk point. Our market opinion certainly has not changed (bearish into summer). We simply sold too early on this rally. For hedgers, hold all positions and sell anything not yet hedged…Rich Nelson