The Livestock Report
by Robert Short
Livestock Market Comments(146)
5/21/2012
by Bob Short, PFGBEST
1-800-280-4566
rshort@PFGBEST.com
Monday, May 21, 2012 at 11:19 AM
We lost $1.20 on pork product Friday, but did put 93 cents on product for the week against a two year average of losing $2.14. We lost 55 points of June’s premium basis last week, but still closed with a rather large premium of 540 against the lean-hog-index (8202). The last two year average has June at a discount of 408.
We have put $5.47 on wholesale pork product over the last three weeks and this, in turn, has pork packers paying $3.00-$4.00 higher for cash hogs. Paying higher money for hogs has advanced the lean-hog-index a small 110 points over this last three week period, but still leaves hog futures with a rather large premium basis. We need to continue to feed the market daily friendly fundamentals or we will have a 150-200 point correction this week as traders always worry that upcoming Memorial Day business has now been booked.
June futures closed 212 higher last week, but daily volume from the previous week was lower by 9.2% with a decline in open interest of 10,360 contracts. This usually means a short term correction could be coming.
We want to be a buyer of June hogs on a correction this week or next assuming pork product can continue its seasonal rally that started several weeks late. There is good support for June in the 8560 area with better support showing in the 8460-8500 area. The rather large premium basis will give us nice one-two day corrections when product appears weak, but at this time of year we should see wholesale pork product working higher.
One near term negative is hog packer operating margins. We went home Friday with a negative 10.74/hd. against a 3 year average positive $3.78/hd. Putting $3.00-$4.00 on cash hogs the last several weeks, while putting $5.47 on pork product, is keeping the negative basis at about the same level. This could become price limiting in the future, but at this time of year traders are always looking to buy breaks knowing the strong pork product price rally into late June/July on what is normally a 125,000 head reduction in weekly harvest levels into summer.
We have been looking to buy June hog futures against selling June cattle in the 3000-3200 area for the last several weeks. The spread went home Friday at 3210 and with a friendly monthly Cattle-on-Feed report Friday, is now trading in the 3330 area. We talked Friday about the top side of this 200 point range being a good possibility. Thanks to the Friday report we may have a small loss. We give this trade the next two days to see what happens. Monthly reports are always a problem.
Boxed beef had their best week in the last four weeks as choice was $1.41 higher for the day and $3.41 higher for the week. Choice is now at $192.51, and about 3% under its all time high. Box volume for the week was a good 1,056 loads and was 2.5% over the previous week, but 21% less than this same week last year. Retailers watched cattle futures work over 400 points higher for the week and were influenced into covering any fill-in business for the upcoming Memorial Day business. We normally start to work lower in wholesale beef the rest of May and into late July/early August as summer grilling business has been booked.
Just as retailers were influenced by futures 400 point rally last week, beef packers were quick to pay $3.00-$4.00 higher for cash cattle. Southern Plains cattle traded in the $123.00-$124.00 area as of 2PM Friday albeit on very light volume of slightly less than 14,000 giving a small weekly total of 23,490 against last year’s weekly volume of 111,490. After 2 PM trade will be out this morning and it will be important to see if beef packers did a decent weekly volume.
Friday’s Cattle-on-Feed was on the friendly side. Placements were down almost 15% with traders expecting 12%. Feedlot sales were expected down almost 2%, but came in .4% higher. This lack of placements and better April sales has feedlot supplies .8% less than May 1st of last year. It should be remembered that placements were just 6% under the last 5 year average and last year placements were the highest in the last nine years.
Many traders feel the over 400 point rally last week in cattle futures has built-in the friendly report. Don’t forget open interest declined over 7500 contracts as people staying long for the ten week down-side correction are now getting out on the past three week rally. June open interest has declined over 80,000 contracts (52%) over the last three week rally.
We have been waiting for the last three weeks for June futures to get into the 118.00-120.00 area and as I write this we are trading 119.87 with help from a friendly monthly Cattle-on-Feed. Let’s sell June cattle today and risk a close over 123.00. The strongest seasonal of the year should be coming this week with the added talk of Memorial Day business being finished.
We are short June cattle against long June hogs in the 3000-3200 area. We have a small loss thanks to a friendly Friday cattle report. This should be in the market and out of trader minds by tomorrow.
Substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
Robert Short
PFGBEST Research Team
rshort@pfgbest.com
