Lean Hog (CME:HEV14) Fundamental Support: There is still a pretty heavy bearish bias in this market. We still have yet to stop the losses in cash hogs or pork. There is still an expectation that demand after the holiday will be a problem. Friday’s Cold Storage report indicated July pork demand may have been a little less than previously expected.
Like cattle, the issue here is not that prices need to go lower. It is that futures have taken this to the “nth” degree. Demand has fallen from earlier this year, but it is still pretty good. Pork production is still running below last year. Why are October futures only holding a $2 premium over last year’s settlement?
Live Cattle (CME:LEV14) Fundamental Support: Though Friday Cattle on Feed and Cold Storage reports held bearish implications, futures traded $1 higher today. The COF report indicated that we did not even meet the low Marketing number that analysts were expecting. That would imply there are more market ready numbers available in August and September. That bearish news seemed to coincide with this afternoon’s finding that showlists grew by 14,000 head in the latest week. The bigger numbers were found in Nebraska and Colorado. Slightly smaller numbers were reported in the South. We are in the process of repairing the sharply low levels from July. Last week saw a moderate jump over the past five weeks. This week will be the same.
In the big picture, we would not say that today’s higher trade was any rejection of Friday’s bearish reports. It is likely that most of the trade fully believes these numbers. The issue in this cattle market is not one of whether prices were going down, it was at what price will the bottom be seen? As noted last week, our position is that live cattle futures are undervalued. Sure, in the short term cash cattle could drop to the $148 area (two weeks from now). By the end of the year we can see $155 again.
One interesting point about today’s rally was that it was led by feeders. Where bears can make a valid short term bearish argument for live cattle it is hard to make the same case for feeders other than “…they are high priced”. From a supply and demand perspective, this is a market which still has strong backing. We are now getting questions in the office about lifting those hedges applied last month (bear put spread). It would appear we are ready to stabilize futures. For those who do lift hedges we would suggest to put them back on below last week’s lows.