Discounted Hog Futures Should Rally

MORNING LIVESTOCK REPORT  

LEAN HOGS: 

Open interest surged higher in hogs yesterday, rising by 6,625 cars with higher OI noted in every contract except the soon to expire Oct. This is bullish. As stated in the evening wire, we have a basis problem. Dec futures reside more than 900 points under the CME lean hog index which has recently turned higher. Hams, while quoted lower yesterday and pulling the carcass lower, are cheap and attractive to our largest customer, Mexico. Pork exports are slowing mostly due to China but overall exports remain solid. The hog & pig sheds light on the fact that we have fewer hogs to market over the next six months than expected. The problem is the major headwinds are not going away. These include the slower packer chain speed by law, California’s prop 12 which is going to disrupt up to 15% of domestic demand starting in January and the looming prospect of an ASF event in the U.S. The U.S. pork producer find themselves in an interesting situation. They’re the only producers in the world currently making money and we’re still culling breeding stock. The key is remaining disease-free. Look for another higher close today as discounted futures work to narrow the gap between cash and futures.  

LIVE CATTLE: 

Open interest in LC rose by 1,782 cars yesterday. The deferred contracts edged slightly higher late and many settled near the session highs. The chart pattern is looking like a giant wedge pattern. Will the market break down from the wedge or breakout to the upside? It’s decision time. IMO, the market will breakout to the upside. The evening wire listed my reasons for a bullish expectation. We bought Jan feeders on the open yesterday. We’ve started accumulating a long-term position in the Oct 22 LC. Cash trade, on very light volume, was reported as low as 122 yesterday. Call that $2 lower. The fourth quarter starts next week and the USDA is projecting an average fourth steer price of $1.31. This suggests that a $10 cash rally is just around the corner. My sources are telling me that Brazil has reached out to China in regard to their ban on Brazilian beef imports (due to two BSE cases reported this month) with no response from the Chinese. Year to date U.S. beef exports (Jan-July) are up 21%. Supplies of finished cattle are projected to peak any minute. Long-term, supplies will be declining. Beef cow slaughter, both in the U.S. and Canada, has been highly elevated all year. I’m bullish.  

CORN AND SOYBEANS: 

Wednesday recovery mode, recovering from the Tuesday selloff, which was mild. Stocks were lower yesterday but a bit higher early today. The key development this week is the realization that a global energy shortage looms large. Europe is experiencing shortages of electricity and natural gas. The EU is dependent upon Russian natural gas…good luck with that. Coal prices in China are record high. My point is that rising energy prices will lift all boats. One-third of corn demand goes to make ethanol, which is expected to rise. Biodiesel is cheaper than burning pure diesel. Shifting gears, quarterly stocks will be released tomorrow at 11:00. There’s no way to guess and/or gauge what happens in the wake of this report. We are bullish and long corn and soybean oil and we have bull call positions on the book in wheat. Our exposure is not real great.  

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