Bears to retake control of this market for the remainder of the month

September 26, 2017 11:49 AM

Lean Hog
Futures traded mixed Monday, lower in the morning but up by the afternoon. The likely reason was more of a gap-filling move on the December than any real change in fundamentals. The December exactly filled the upside gap to 57.75. The type of day, with a lower low than the previous session but also a higher high, is called an Outside Day. The close higher implies slightly higher trade tomorrow morning.

General news is negative. Supplies have been coming in about as expected but the price response to that supplies worse than expected. The Lean Hog Index, the measure of cash hog pricing that futures are settled against, is now under $59. December futures settled at $57.42. The cash hog market has already filled almost the entire downside Allendale had been projecting ($56). There are just $2 to $3 downside left in the face of three to seven weeks of generally higher supplies? This market is pricing in the idea that cash will bottom in October like last year. We feel uncomfortable with that suggestion.

The monthly Cold Storage report was neutral. USDA found 575.681 million lbs of pork at the end of August. That was near the 573.5 trade estimate (ALDL 567.7 + one other analyst 579.3). Compared with last month this was a 21 million lb. increase. August is normally a stock building month with a five-year average change of +15.

Monday's kill hit up to 460,000 head. That is a record for the year, for any previous Monday, and likely of all time. For the next few weeks, prices may be uncomfortable. Our December expiration price is $56. Hold all hedges until November.

Live Cattle
We expected lower prices Monday but the limit down action within a few minutes of trading was a little surprising. Bears will likely retake control of this market for the remainder of the month and into early October based on the COF and CS reports. Whether these reports push cash cattle back down to the current low, and to new lows for the year, is the question. The current cash cattle price low for the year of $104/$105 was posted three and four weeks ago. Last week's average price was $108.50 according to USDA's weekly summary report.

One positive aspect to last week's sale was those late Friday trades had a high volume. We cleaned up most of the lax marketing problem posted in recent weeks. From week ending August 27 - September 17 free market cash cattle sales ran 278,777 head. That was a full 90,867 head of the previous year in the same period. Last week's free market trade ran a stout 112,882 head, 72,518 head over the very low number posted last year in that specific week. Cattle feeders saw the bearish 2 pm reports and threw everything they had at packers. It was a smart move. Also, cattle feeders really got away with holding numbers back this time. They were doing it when cash prices were $104 to $106 and ended up with sales at $108. Don't expect lax marketings during the peak supply time of the year to work very often.

Also, supportive, the regular Monday Comprehensive Boxed Beef report was released. This holds information on end-user buying that we watch closely. During last week's trade the amount of product sold for extended delivery, 22 - 60 days out, ran 64% over the previous year in the same week. Numbers have been good in five of the past six weeks. The total sales for this type of buying ran 46% over last year during this period. End users were starting some buying in anticipation for a post-price low rebound.

Friday's Cattle on Feed showed 2.6% more placements in the month of August. That was a clear surprise against the trade expectation of a 2.1% decline. It was higher than estimates from 9 of 10 analysts submitting estimates (ALDL -7.1%). August placements determine a part of February through June slaughter. The number of cattle marketed in August, those finished with their feedlot visit. came to 5.9% over last year. This was right next to the 5.8% trade estimate. With a placement surprise, the number of cattle in feedlots as of September 1 totaled 4% higher than last year.

The bearish COF report was also combined with a bearish Cold Storage. USDA reported 476.260 million lbs of beef at the end of August. That was far over the 426.5 average trade guess (ALDL 435.7 + one other analyst 403.4). This 44 million lb. increase from the previous month was the largest August beef stocks increase in 15 years.

Futures and likely cash cattle prices are going to fall into the end of the month. In our opinion, the exact price is all about psychology and not quite exact "economic value" arguments. If our $108 and $110 expiration objectives for the October and December gaps are correct, this market does not need to fall to new lows for the year. For speculative trading, we will stay with the plan as it stands and takes profit on one more lower leg down. We will not get belligerent with our slightly bearish price outlooks here. There are a lot of disappointed bulls who may not be willing to give up their stance. We will discuss long-term buys next month.

About the Author

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA.