Weekly Roberts Report: Livestock markets may be topping out

US - Agricultural US Commodity Market Report by Mike Roberts, Commodity Marketing Agent, Virginia Tech.
calendar icon 13 September 2006
clock icon 9 minute read

LEAN HOGS on the CME closed higher on Monday after starting the day out on shaky ground. The OCT’06LH future closed at $67.00/cwt, up $0.450/cwt and the DEC’06LH contract finished up $0.125/cwt at $64.90/cwt. Higher cash hog prices and a large volume amid unwinding bear spreads due to the Goldman Roll pushed nearby contracts up, floor sources stated. An estimated 9,000 spreads were done during the day with over 5,200 coming near the end of the session. Steadier prices are expected again on Tuesday. USDA reported early on Monday that the average Iowa/Minnesota hog price was up $1.23/cwt at $68.96/cwt.

Pork plants are reported as running at or near capacity increasing demand while simultaneously pressuring prices. USDA placed Monday’s hog slaughter at 414,000 head, the second-largest on record matching last Wednesday’s rate. USDA estimated the kill rate at 416,000 head last Tuesday after the Labor Day Holiday. Also according to USDA on Friday, pork carcass cutout was down $1.21/cwt at $73.85/cwt. The latest CME lean hog index was placed at $69.99/cwt, down $0.07/cwt. The average pork plant margin for Monday was estimated at $5.95/head, down from $7.90/head last Friday, according to HedgersEdge.com.

Cash sellers should still consider pushing hogs off the feeding floors as heavy as possible maximize income. Hedgers are still out of short positions but should remain poised to place new orders. With 4th quarter and 1st quarter pork production expected to be record large, partial hedging may be wise on those marketings. Corn users may think about pricing a significant portion of corn supplies at this time as input prices may have established their lows. The USDA WASDE report issued Tuesday, September 12, 2006 will give a good indication where corn prices are going.

Market moving factors are seen in the crude oil and gold markets, as well as the USDA World/Supply Demand Estimate (WASDE) due out tomorrow. Falling crude oil and gold prices move funds to withdraw money from hedge accounts. Corn and soybean production numbers are expected to increase slightly while wheat may show further decline. An expected increase in bio-fuel demand may support prices in both corn and soybeans in the coming months.

Some estimates indicate that the U.S. may need to plant an additional 4 to 5 million acres of corn next season to keep pace with demand. The 2008 production year looks promising for both corn and soybean producers as demand may increase. Plunging gasoline prices are also seen as influencing both corn and soybean prices because of the energy ties between them. Livestock markets may be topping out as both cattle and hog markets were lower today due to declines in other commodity markets.

CORN on the CBOT sank on Monday with the SEPT’06 closing at $2.286/bu, off 3.0¢/bu. The DEC’06 futures contract fell below the 20-day Moving Average (MA) of $2.412/bu early on Monday before recovering to close $2.434/bu, down 2.4¢/bu for the day. Fund selling coupled with sliding gold and crude oil markets drove the bears. One trader was quoted as saying that “funds are just selling everything here.” One bright spot though is that corn is seen as being bought as a hedge against the surging ethanol industry. However, some floor sources said corn was being pressured by the approaching harvest of a huge U.S. corn crop and positioning ahead of the USDA WASDE crop report due out on Tuesday. Some expect the U.S. corn crop to come in at 10.990 billion bu, the third largest on record.

Crop weather was viewed as bearish by some since it may add tonnage to the later-maturing corn plants. Exports were quiet over the weekend. Cash corn bids in the Midwest were steady to weak resulting in spotty movement to elevators. Basis numbers for corn in the Mid-Atlantic strengthened on Monday. Friday’s CFTC Commitment of Traders report for futures/options combined showed funds increasing long positions by 9,072 lots to 283,122 as of last Tuesday. Funds in short positions were down 4,865 lots at 153,888 contracts. Producers may not want to price any more of the 2006 or the 2007 corn crops while taking a wait and see approach to the ethanol demand factor. Storage may pay but be sure and put a sharp pencil to your storage cost calculations before making that decision.

SOYBEAN futures on the Chicago Board of Trade (CBOT) lost ground on Monday. The SEPT’06 soybean contract finished the day at $5.320/bu, off 5.0¢/bu. The NOV’06 futures closed down 3.4¢/bu at $5.444/bu. The same spillover reactions affecting corn from gold and crude continued to pressure soybeans amid liquidation across the entire commodity complex. Funds sold about 2,000 contracts by noon as all traders began to even positions ahead of the USDA WASDE report release on Tuesday.

The expectation was that the U.S. soybean crop estimates will increase from 2.928 billion bu to between 3 and 3.2 billion bu. U.S. ending stocks for soybeans could rise as much as 100 million bu. Cash bids for soybeans were steady to slightly weaker ahead of the report due to slow farmer sales. Trade data from the CFTC Commitments of Traders report issued last Friday showed large funds in net short positions in CBOT soybean futures and options combined. Cash sellers should have considered advancing ’06 crop sales to 70%-80% two weeks ago. A put option in the November contract may still be considered to establish a price floor.

WHEAT in Chicago (CBOT) finished the day down with the SEPT’06 contract closing at $3.980/bu, off 2.0¢/bu and the DEC’06 futures down 2.4¢/bu at $4.130/bu. The good news is that both contracts are still 13¢/bu to 15¢/bu higher than this time two weeks ago. Sympathy with declines in the other markets and sliding gold and crude oil markets were bearish influencers. This sparked technical selling in Chicago (CBOT), in Minneapolis (MGE), and in Kansas City (KCBT).

Fund selling accelerated through a series of sell-stop orders after Egypt canceled a previous tender and India announced U.S. wheat would not be included for consideration in its upcoming purchase of 1.67 million tonnes (61 million bu). Export inspections for 9.6 million bu of U.S. wheat also proved bearish amid expectations of between 15 million-20 million bu. Friday’s CFTC Commitments of Traders report showed funds adding to net heavy long positions in MGE spring wheat futures and slashing net short positions in CBOT wheat as of September 5. Cash sellers with up to 80% of the ’06 crop sold are still in good shape. Hedgers may consider having 70% of the ’06 crop protected.

LIVE CATTLE in Chicago (CME) closed lower despite lower feed grains on Monday with the OCT’06LC at $91.850/cwt, off $0.450/cwt. The DEC’06LC closed at $91.750/cwt, down $0.425/cwt. Both months were pressured by general weakness in many commodity markets, including gold and crude oil, and a somewhat weaker-than-expected cash cattle market late last week. Cash cattle traded $90.00/cwt-$91.50/cwt late Friday with most sales in the $90.50/cwt-$91/cwt range. The USDA report late on Monday showed cash cattle trading in the 5-market average between $89.50/cwt-$90.50/cwt.

This was down $0.50/cwt-$1.00/cwt from the week before. Several feedlot and trading floor sources said they were somewhat concerned that cash cattle may be topping out after cattle sold below expectations and some of last week’s offerings went unsold. Packer margins were in the red and that will most likely encourage lower bidding. USDA put the average beef plant margin on Monday at a negative $9.65/head. This was $4.45/head lower than Friday’s report, according to HedgersEdge.com. A firm boxed beef market and slowly growing exports continued to support prices. South Korea announced last Friday it would resume imports of U.S. boneless beef. USDA put the choice beef cutout at $148.97/cwt, up $0.15/cwt and the highest it’s been in just over 3 weeks.

Technical selling added to lack of support after the OCT’06LC closed under the 20-day MA last Friday. Active October/December spreading by locals and fund action (including the Goldman roll) accounted for most of the trading volume during the session on Monday. During the month prior to delivery, the Goldman Sachs Commodity Index fund’s long positions are rolled forward from the fifth to the ninth business day. This is known as the Goldman/Sachs roll. Traders estimated there were 9,000 to 12,000 such spreads on Monday with about 5,000 of those coming near the close.

Cash sellers should consider protecting a portion of 4th quarter ’06 and 1st quarter ’07 marketings at this point. Corn users may think about pricing a significant portion of corn supplies at this time as input prices may have established their lows. The USDA WASDE report issued on Tuesday, September 12, 2006 will give a good indication where corn prices are going.

FEEDER CATTLE at the CME ended mixed with the SEPT’06FC closing at $118.650/cwt, up $0.075/cwt and the OCT’06FC contract closing off $0.375/cwt at $117.850/cwt. The drop in some feeder cattle months came despite a recent record-high CME feeder cattle index and lower CBOT corn futures. The CME Feeder Cattle Index set a record high on September 7 at $120.10/cwt, up $0.88/cwt while CBOT corn futures on Monday were down from 2.5¢/bu - 5.5¢/bu in early trading.

Lower live cattle pressured feeder cattle. In addition, November/October spreading via the Goldman Roll and late profit taking sank the October futures price at closing. Cattle feeders may want to watch these markets trying to catch an “up” day to sell. Corn users may think about pricing a significant portion of corn supplies at this time as input prices may have established their lows. The USDA WASDE report issued on Tuesday, September 12, 2006 will give a good indication where corn prices are going.

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