Lean Hogs (CME:HEQ14)
Fundamental Support: The day’s kill was brought down to 368,000 head. This week’s numbers will be restrained a bit. This comes not due to a bunch of new plants running only four day kill weeks but by a reduction in hours.
Today’s run was 5,000 head under the guess posted by the three analysts who submit numbers. This week now marks week number three where we can identify this winter’s PED problems in the summer slaughter mix.
Last week we noted surprise that the trade assumed August futures should be priced at a $5 discount to current levels. Even after today’s $2 gain is considered we still have the same confusion.
In the past couple of weeks the market kept July futures in their good uptrend as cash hog prices remained strong. During this time the August, which has been the dominant contract, saw some selling due to the rolling of long-only index traders moving to the October.
This represents opportunity for astute traders. With July expiring tomorrow at noon it is hard to ignore this discount. We are looking at $140 for a target on the August.
Live Cattle (CME:LEQ14)
Fundamental Support: This afternoon’s count of market ready cattle for sale this week, called the showlist, showed a 4,000 head increase over last week. On top of last week’s numbers, which were 35,000 head over two weeks ago, it appears as though the numbers are finally coming in. It will be interesting to see whether the entire shortfall in June’s marketings is made up this month or whether this goes into August.
Bulls do have a couple things to hold onto. Though extra numbers of finished live cattle are finally showing up, that certainly does not fix the feeder cattle supply problem. On top of that, it is clear that wholesale beef prices have not “yet” posted a major top. Supplies in the beginning of the production chain are still tight. Demand on the back end of the production chain is still better than expected. This is a rearrangement for the middle end of the picture, live cattle supplies. We can see the August getting down to $145 in early August. One thing to keep in mind is that futures already have the vast majority of the coming downside priced in. We will hold our moderately bearish trade position (sold call).
In other news the trade is hearing more reports over problems with the U.S./E.U. trade deal negotiations. One of the unresolved issues is with the US practice of chlorine washing chicken. This practice kills bacteria and extends the shelf-life. Germans especially, are concerned. The growing backlash against the finding this spring about the U.S. spying on the German chancellor is a second issue to consider.