Lean Hogs (CME:HEV14)
One of the discouraging issues regarding this week’s change in supply is just how poorly the cash pork market is taking it. Since Friday we have peeled back $10.31 off cash pork. While we all know that rising supplies generally means lower prices, this is a bit more than people were anticipating. In fact judging by that wholesale pork move we have to argue that cash hogs have not fallen enough.
That brings the debate into focus here. Is this price response just a factor of the supply change or is demand promptly falling for the post-Labor Day period? While it is too early to tell on the demand side, we must note that the industry is discussing it a bit more recently. Keep in mind this is something like the eighth time for traders to call for lower demand this summer. It will be interesting to see how packers behave in the coming days. They have a good chunk of next week’s kill already procured as producers are now getting back to calling them.
For futures, we won’t say that today’s mixed to lower trade, instead of straight down, was the sign of any change in fundamentals. For this price we still have too many hogs showing up and concerns about Russian demand. Instead the key interest is in the discount that futures hold. We still suggest October should see some stability after tomorrow’s expiration of the August. We continue to encourage farmers to hold their hedges.
Live Cattle (CME:LEV13)
Another day of losses in futures was seen. Over the past five trading sessions the October has now lost almost $10. Yesterday’s news of the surprising Northern cash cattle sales remains an overhanging issue. There is no argument here about the price direction. We have more cattle showing up in August and the Russia story is a bearish one for beef’s competitors, chicken and pork. The interesting thing here is the size of the decline. Are we also taking out some of the “hot air” that built up in this market?
Our price projections from just two weeks ago were for expiration prices of $153 for the October and $156 for December. We don’t have a problem with the December outlook as there is still a lot of time until then. With the October you could take off $2 for the Russia news’ impact on beef (indirectly). That still leaves us wondering when enough is enough. Futures are implying $147/$148 trade at the end of this month. It is hard to see cash post that type of break in just two more weeks. We tried to buy this market this week but were rejected. We will stand aside here. Hedgers should continue to hold hedges.