Livestock Angles: Futures, cash go opposite ways

July 18, 2008 03:07 am

— The cattle market is in an interesting phase after the first week of July has passed. The futures market and the cash sales appear to going in opposite directions.
Cash was very firm in that first week of July with prices touching $102 per hundredweight basis the Midwest, while the futures market finished lower on the week. The fact that the futures market has been carrying an extremely big premium to cash was certainly a factor in the weakness. However, with the market sentiment very bullish on the idea that either demand or the lack of supply of cattle was the driving force behind the recent rally, really doesn’t explain the weakness experienced in the futures.
It has been no secret that the funds have been the largest buyers in the futures over the past several weeks, bringing about the huge premiums in the market. This large spread between cash and futures has allowed the packer room to increase their bids for live inventory while locking in a profit with futures and maintaining or increasing their profit margins.
The interesting fact is that there does not appear to be a strong retail or export demand for beef, as boxed beef movement has been slow. On the other hand, the beef cutout values have risen above $170/cwt. choice for the first time since 2003 while retail prices have remained virtually steady. Obviously there appears to be some disparity in the cattle pricing from start to finish, which will have to change at some point because the profit margin for some link in the distribution chain is getting too narrow.
Because of the recent rally in the overall market, it would appear that prices are currently susceptible to a correction in the next few weeks. Producers should remain current and lock in inventory if presented with profit opportunities.
The hog market has experienced quite the rapid sell-off since peaking in late June. Hog numbers continue to overwhelm the market and demand, although good, has not been able to overcome the onslaught of pork product. Coupled with the U.S. Department of Agriculture releasing a Hogs and Pigs Report on June 27, which was interpreted as bearish, this turned the market lower.
Pork cutouts have remained fairly stable — indicating fairly good demand for pork — but the sheer quantity of animals stymies any further price appreciation at this time. The market appears to be a bit overdone and a recovery rally may be seen, but until hog numbers decline, the market seems vulnerable to further weakness in the weeks ahead. Seasonal tendencies at this time of the year are also considered negative and the trend is for prices to decline into the fall months. Therefore, producers should remain current and use rallies to protect inventories.

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