Inside Futures, IL
06-26-07
Daily Ag Market Commentary
by Chris Haverkamp of Paragon Investments, Inc.
Beef:
Live cattle futures were lower at the end of Tuesday's day session. June was
down hard as weak cash fundamentals prompted concerns about the futures
premium that could attract additional deliveries. Some spreading pressured the
other contracts, but for the most part these deferred contracts looked the other
way and let June fall. Because of this, the June-August spread has been in a
freefall of $3.00 since last Monday. The low-range closes suggest a bearish bias
for tomorrow. The bulls seem to have retreated to behind the scenes. Thus, the
question is what will happen make them step forward. Some would say that
December live cattle need to make a new low below the last swing low of 94.00
before buyers will be interested. Friday's USDA Acreage report could also be
trigger. If that report shows more corn acres, then the electronic trade in the
cattle complex may offer the first opportunity to trade a bearish corn number by
buying feeder and live cattle contracts. By that time, if futures are still down, there
is likely to be a lot of shorts wanting to get out as well. In fact, as this idea
circulates, there may be enough short covering to support live and cattle futures
going into that report. The bears have been in control and there doesn't seem to
be much to pry control away from them. However, the numbers show that there
should be tighter supplies coming. Looking at a beef price chart, Choice prices
are at a level that has been supported no less than four other times. Thus,
retailers should view these prices as worth buying; especially since live cattle
futures suggest that these will be the lowest prices for this year and next year. I
am not ready to declare a bottom yet as delayed marketing's often make for a
bearish backlog at this time of year, but it seems close and higher prices from
here shouldn't be surprising.
Feeder cattle futures were lower, pressured by the lower live cattle futures and
the higher grains. Corn on its close retraced to around unchanged, which may
attract some buying of feeders. As mentioned above, there is the potential for
Friday's Acreage report to be a mover of feeder cattle. The electronic feeder
trade is very light so even though it would be more natural to buy feeders on a
bearish corn number the liquidity may put more trading into the live cattle
electronic trade. Feeder cattle futures are not oversold like live cattle so the
incentive and willingness to buy what are historically high feeder prices will
continue to amaze me, but that would be the play and it may be hard to find
sellers in that environment to make the action very volatile. Buy stops are likely
sitting above the 100-day moving average which sits at 109.11 and is rising
about 5-6 cents a day. Cash feeder prices were mostly lower for the reports I saw
today. The August contract is about even with the feeder index and will need to
pay attention to the cash market, but it may be far enough away from expiration
yet that the current cash market will be secondary to expectations of what feeder
demand will do.
Lean hog futures were sharply lower at the end of Tuesday's day session. The
bearish mentality was attributed to ideas that the cash market would remain
weak after Friday's Hogs and Pigs report shows more expansion than expected.
Hog slaughter for today was on par with a year ago, but the week-to-date is still
large, up 6.7% from last year. A survey conducted by the University of Missouri
and Iowa State University showed that the big players in the hog industry were
looking to expand to the tune of 5%. That is much bigger than the mostly steady
shown by USDA in the March report and the few guesstimates I have seen for
Friday's June report. Very profitable conditions over the last four years make it
easy to explain why there should be expansion. But it has been reportedly kept in
check by environmental issues, legal battles, high building costs, and at times
high feed prices. None of that has really changed and the potential for
substantially higher feed prices would seem likely to easily squash any ideas of
expansion, especially in the midst of pork exports not being so good of late. The
other issue is that Friday's morning Acreage report could prompt action in the
hog pit. The mentality of late has been that higher corn prices meant lower pork
production (i.e. higher hog prices). Thus, a bearish corn report could prompt
renewed sell pressure for those brave enough to trade ahead of the unknown of
what is in USDA's afternoon Hog report.
Milk futures were sharply lower. The sell pressure was attributed to profit taking
as new highs attract top pickers and ideas that the record high prices would curb
demand. Cheese, nonfat dry milk, and butter prices were mostly steady today.
The buying interest has posted new record highs in open interest for a bulk of
this month's trading action. It will be interesting to see if today's lower action
indeed came from longs exiting or whether the bears are just getting more
confident to place new sell orders as well.