Cattle trade takes meat report with a grain of salt

Trading wrap-up for Tuesday, May 27.

Lean Hog (CME:LHM14) Fundamental Support: We are sitting with a cash hog price measure, the lean hog index, at $111. Futures are suggesting it will be $116 on June 13 and $123 on July 15. We certainly feel that a premium is due for these summer contracts but it is hard to support that idea when cash hogs are barely over their current bottom on May 12. Retail pork prices are now running 13% over last year at this time without an inflation adjustment. So far consumers have not started to run away from these prices. On the other hand next week will mark the start of the low June supplies. For the short term, as long as cash markets have yet to firm, it is likely traders will take off the premium in the June and moderately July.

Working Trades:

  • (1/3) Sold 2 June 96.00 puts 1.95, risk to 1.97, objective 0. Closed 0.02.
  • (1/24) Sold 1 June 98.00 put 2.02, risk to 2.10, objective 0. Closed 0.02.  

Live Cattle (CME:LCM14) Fundamental Support: The trade took this morning’s wholesale meat report with a grain of salt. Though boxed beef was up 91 cents and 1.59 for the two quotes it failed to support futures. It has now been six trading sessions since the recent rally hit its peak. On the beef issue we must point out that in 8 of the past 12 weeks boxed beef did not go in the same direction as cash cattle. We have the conflicting issues of higher supplies of cattle and higher demand for beef. This afternoon the weekly collection of showlists found a 10,000 head increase over last week at this time. We are a little surprised the increase was so small. This would now represent four weeks in a row of packers holding back market ready numbers in an effort to avoid buying high priced feeders. We would have expected a 15,000 to 20,000 head increase this week.

All states in the Plains saw a very small increase. On the price end of things we were a little surprised to see USDA’s cash cattle wrap up report showing an average live price of $143.71. That would imply there were a few $143′s that slipped through the reported numbers of $144 and $145. Futures are now pricing this year’s cash cattle lows at $135 during the month of July and a rebound to $136 at the end of August. We are forecasting $132 for a cash cattle discount. In the big picture this trend of delayed marketings is not too surprising given the feeder cattle price problem. It certainly is concerning no matter how you cut it.

Trade Recommendation:

  • (05/27) Sell 135 August call market, risk 1.40 from entry, objective 0.
About the Author
Rich Nelson

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.

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