A little more pork than expected

Lean Hog Fundamental Support

The Monday 2 p.m. Cold Storage report found a little more pork than expected: 599.932 million pounds of pork was found in the nation's frozen warehouses at the end of July. That was over the 569.4 trade estimate. This represented a 13 million pound increase for the month--quite a reversal from the five-year average change of a 22 million decline. This was in fact the first increase in stocks in July in 10 years. To put this into perspective, that increase in 2006 was the only increase for July in our historical database that goes back to 1970.

As noted in the morning comments, the Chinese government has decided to reinstate its extra tax on U.S. chicken imports that expired last year. This tax had been in place for five years as part of an anti-subsidy/dumping investigation. They announced another five-year period with this extra tariff in place. It is not a lot, but the extra 4% does inhibit trade. The latest data for both mainland and Hong Kong combined shows July US exports to China up 5% year/year. You may see that curtailed to a -5% to +1% range with this news. As a whole, anything more hitting U.S. exports is a problem. Our total exports, to all countries, was 11% under last year in June

For speculative trading we have taken profit on the short 64 call and have now sold a put. Selling a put alone is essentially making a bet that prices won't push below a specified strike price ($52 via the December in this case). With this strategy you win, on a limited basis, if prices go up or if prices stay the same. We do not yet feel comfortable with long futures at this time.

 

Live Cattle Fundamental Support

The Cold Storage report was a little bearish for beef. That comes on top of Friday's slightly bearish Cattle on Feed. The USDA found 469.253 million pounds of beef in warehouses at the end of July. That was more than the 445.4 estimate submitted by two analysts. This was a 13 million pound increase over the June data. The five-year average for July is a 10 million decline.

Friday's Cattle on Feed report shows July placements 1.6% over last year. That was over the 0.5% trade estimate. Also, when factoring the calendar adjustment, the actual placement number would be 9.4% over last year. Cow/calf producers continue to put the numbers into the feedlot now that they have stopped expansion.

The afternoon showlist showed a 17,000 head decline. Like with that 31,000 head decline from two weeks ago we are not going to get too excited. Cattle feeders have seen these futures all advertising for lower prices up ahead and are trying to scare up some buyers. Announcing that you're pulling numbers off showlists does work but only when we have tight supplies and eager packers. Right now we don't have a tight supply situation. In fact, it is set to sharply increase over the next four weeks.

On the charts it was interesting to see October get within 10 cents of the 109.10 gap then rebound. We expect that gap to get filled and for cash to fall to $110 next month.

About the Author

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. www.allendale-inc.com.