Livestock Report: June 1, 2012

We put an additional $1.17 wholesale pork product yesterday and are now $3.98 higher for the week after losing $3.51 last week as Memorial Day business came to an end. Last year, for this week, we lost 27 cents for this week, and in 2010, pork product lost $2.07 this week.

USDA national cash hog  pricing is $1.12 higher for the week and, in spite of a rather large advance, the lean hog index was 47 lower yesterday and is now 75 lower for the week at 8451. This puts July hog futures at a very large 695 premium to the index. The 8-year average for yesterday has the July hog futures at a 16-point discount. Traders always look for better pork product news in June as slaughter levels seasonally decline and product is forced higher. The fact that product started higher this week inspired friendly psychology and an advance in the July basis premium of 564 points to an 8-year high of 695.

There is now floor trader chatter about a 3- to 5-week shortfall in market-ready hogs, with talk that July may go into the 9300 to 9500 area. This type of fluff talk always shows after traders get long and need ammunition to continue the rally.

Pork packer operating margins remain in the basement; at the close last night, they were a negative $9.24 per head. In spite of pork product being 10% to 20% under last year, we can’t seem to get support on a positive operating margin. Last year also showed a negative operating margin of $10.52 for this week when product was lower, too, but in 2010, the margin was a positive $11.56.

There is good technical bar chart resistance in the 9200 to 9250 area with excellent resistance between 9400 and 9500. With a sky-high July basis premium, it is tough to get long looking for a shortfall in hog numbers for the next month. On the other hand, June rallies that usually turn to later in the month selling provide some trading impetus. July hogs usually close lower for the month of June.

I have no idea as to a hog trade at this time. We wait and watch. At this time I would look to sell a rally in July. Should pork product falter next week the basis will evaporate quickly.

Cattle: We continue higher in choice boxed beef as we added an additional 31 cents yesterday and now find choice beef at $197.31. This is now less than 1% under our late February yearly highs and comes at a time when retailer beef buying starts a seasonal decline. A normal break into late July/early August would put the present choice beef into the $170 area; this, in turn, should take cash cattle (now $121) down to $115 at best.

As long as cattle futures stay discount to cash cattle it will be possible for feedlots to sell their current cattle population for lower money and cover this with lifting a profitable hedge.

Yesterday found Nebraska processors paying steady carcass money at $194 with a small amount trading $1 higher at $195. Nebraska live cattle traded $2 lower at $121. Southern plains cattle did not trade a large enough number to be quoted.

Assuming day-to-day fundamentals follow a normal negative route over the next few weeks, I would look to sell June cattle in the $118 to $120 area should hog futures pull cattle into this area.

With boxed beef close to all-time highs at wholesale, and retailers pricing beef 6% over last year, it’s tough to see where June and July beef business will come from.

Three-day beef volume this week at 638 loads looks to be flagging, as this is 22% less than last year and 25% under the 3-day holiday total in 2010.

If you stayed in the short June cattle against long June hog spread from several weeks ago you have just seen a 4-day selloff of 637 points. It’s unfortunate that a friendly Cattle On Feed and bearish pork cold storage report probably forced you to liquidate.

We look to sell cattle rallies during the first half of June.

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