Cattle(CME:LCM14): Wholesale beef is now up to a 5.67 gain for choice and 3.53 for select for the week. This gives a great argument for potentially higher cash cattle set for Thursday afternoon/Friday. While we do see a chance at it this one is not in the bag. From January through February there was a very strong correlation between changes in wholesale beef and that particular week’s change in cash cattle.
In fact it was a very strong 83% correlation. If beef moved up or down that week then cash cattle would move similarly. Since March though, the situation has changed. In the previous 11 weeks the two only moved together four times. They actually moved opposite in seven of those weeks. This time of year is a tough situation for the trade. While we are still in the sweet spot for demand for the whole year we are also in the period where supply recovers. The week to week changes in cattle supply/beef demand make this market a little tricky. On top of these questions we have highlighted the supply problems looming ahead in the months of June and July.
In the first three days of this week the cattle kill is running 6.4% under last year. Combined with the previous two weeks which were 9.6% and 4.6% under last year, we will have some delayed marketings waiting for us also in June. Last night we discussed why this behavior is now being seen in feedlots. If they were actively marketing ready cattle, those replacement feeders they are eyeing right now are about $17 per cwt. over the price needed to breakeven given current deferred futures. Given the two choices they are choosing the least-worse. While we feel these summer futures are sharply overvalued we will not stand in front of this market with short positions yet.
Hogs(CME:LHM14): It was interesting to see USDA’s cash hog reports show lower prices this afternoon. This came despite the direct conversations we had today which suggested steady to higher prices were being seen. That may set tonight/tomorrow morning’s futures action back just a little. In the big picture the trade has been looking for a cash market bottom for a few weeks and may have finally gotten confirmation of it back on Tuesday were cash hogs were up $2. It certainly makes sense for cash hogs to finally get this downtrend over with.
In the next two weeks pork production will fall to its lowest level of the year (June/July). It is at this point that we make clear distinctions between cash and futures. Astute traders will clearly point out that summer futures have some serious premiums in here. June futures expire in three weeks. How much of a rally will happen by then? Keep in mind the general trade has pretty much given up on the thought of PED problems hitting in the June period. It is holding that expectation back until later this summer.
On the charts it must be pointed out that June futures are still in a downtrend. A strong volume close above today’s highs is needed to change that picture. We are still looking for $130 for summer futures but will not buy with straight futures until the market is ready for it.