Livestock Angles: Cattle start month on high note

August 15, 2008 03:05 am

— The cattle market is starting out August on a positive note as cash and future markets posted strong rallies to start the month.
After slumping during the last half of July, beef cutouts began to stabilize in the $158 per hundredweight area basis choice. This sparked a short covering rally in the futures market which lead to packer margins improving enough to increase their bids for live inventory.
Export demand has been improving over the past few months and this has brought a positive influence to the psychology of the cattle market. Couple the stronger fundamentals with the increase in fund buying and the stage was set for a rapid recovery in cattle prices.
With the current economic fundamentals still weak, a sustained rally in the cattle market seems rather remote at this point. But since placements have been declining over the past several months, supply is not likely to be burdensome in the weeks ahead.
Therefore, the outlook for cattle prices to remain in the $90/cwt. basis the Midwest seems entirely possible through August. Producers should use any excessive premiums to hedge inventories through the fall and winter months.
Hogs have experienced a sharp rally over the past several weeks and many futures contracts have posted new contract highs. Fund buying along with a persistent firm cash market has given a strong boost to the hog market during this time.
Export business has also been a plus for the hog market all year and continues to expand; this has aided in offsetting the excessive supplies of pork product that would otherwise have depressed prices.
Speculation had elevated deferred hog contracts on the premise that high grain prices will force herd liquidation. However, as grain prices have fallen in recent days, there has been a liquidation of these contracts, forcing the spreads between the near buy and deferred contracts to narrow.
As this occurs, the technical aspects will further add a bullish psychology to the market and push prices higher in the short term. Currently cash prices have begun to level off in the lower $80s/cwt. basis the Midwest as packer margins have tightened slightly since pork cutouts have also leveled off in the upper $80s/cwt.
The recent rise in pork cutout prices will most likely cause demand for pork products to decrease and eventually cause hog prices to peak as packers decrease their live inventory supplies. After a brief pause in the current uptrend, look for another push in prices to higher levels before establishing a seasonal peak in the next several weeks.
Producers should be patient and use this rally as an opportunity to hedge fall and winter inventories.

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