Hog Market Comments:
Hams found holiday support last night, helping to put $1.09 on pork product, but we are still 47 cents lower for the week with traders still unhappy with pork product, in total, coming off a light holiday harvest the week previous.
Pork packers have paid $2 to $3 higher for cash hogs this week, and with product staying lower, their operating margins are approaching negative territory.
The 11-day November futures rally came as psychology shifted to the friendly side on expectations for holiday pork business. However, that has not been rewarded and we now find traders taking profits on November longs. Plus there is now a large floor trader group going short (started yesterday) after Wednesday's product surprise loss of $2.10.
Traders continue to attack the short side this morning in spite of strong stock indices and cattle futures. There is good technical bar chart support in the 8950 area with excellent support at 8875. Traders now want to believe near-term export business has been curtailed on continued rumors of off-loading problems at Japanese and Chinese port facilities.
Daily pork trade volume remains quite good and with a less-than-normal premium basis in February futures it's not the easiest time to be putting on new short positions. We need to be looking for 1- to 2-day rallies into next week for a selling opportunity assuming product continues to disappoint.
We took our profits on our long June hogs against short June cattle yesterday, put on when June cattle were at a 2700 to 2850 premium. We may want to revisit this trade later in the month depending on the outlook for cash cattle against pork product.
Currently, we are short April hogs against long June hog when April was at a 630- to 600-point discount to June. If we can get ahead of random noise this trade could be on for the next several months. The 4-year average last-day spread relationship shows April around 1100 discount.
Cattle Market Comments:
The wholesale/retail beef business has been declining for 3 to 4 weeks as record domestic pricing has consumers looking at cheaper pork and poultry. In addition, holiday business is never a good time for beef in general and January usually finds Christmas credit card bills coming due.
Throw into this less than exciting domestic demand picture the present thinking that there has been a large slowdown in export business during November (reinforced yesterday as weekly shipments of 9,000 metric tons was the lightest of the year) and traders are looking for rallies to sell.
The factor keeping them honest is the present large discount futures have to cash cattle ($2.50 to $5.00) and the apparent tight feedlot supplies for immediate sales.
We are stuck for the moment and looking for some fundamental to show up and break present bullish-bearish neutrality. We need to lean to the short side on any up days next week as present declining boxed beef prices will put beef packers back into possible record negative operating margins in the next several weeks.
Some traders expect cash cattle to advance another $1 to $2 higher this week, but I doubt there will be much trading done because feedlots are current enough to not take lower bids while beef packers, quickly cutting weekly kills to support product, are in no hurry to add to harvest inventory.
We are at a stand-off waiting for something to blink. We took profits yesterday on our short June cattle against long June hogs position. For what we know at the present time the short side appears the correct path to take. We look for a rally to sell in the near term.
Have a great weekend.
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