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CME: Livestock Futures Take a Tumble

by 5m Editor
18 May 2010, at 4:28am

US - Livestock futures tumbled on Monday on continued weakness in equity and currency markets, writes Steve Meyer and Len Steiner.

Nearby live cattle futures were down 75 points for the day and they are now down some 450 points compared to a week ago. Nearby hog futures declined by more than 200 points as selling in the heavily traded summer contracts accelerated later in the day.

Hog futures are also down some 430 points compared to a week ago. While there is a bit of weakness in cash markets, as the chart below shows, nothing has changed in domestic and export markets to justify the kinds of declines we are seeing at this moment. What is going on, however, is that market participants are looking to reduce their risk exposure, fearing the impact of a new financial crisis on the global economy.

Money seems to be flowing outside of commodities looking for safe harbors, with gold at all time highs (see chart below) and US$ denominated bond funds also trading strong. We can talk about fundamentals in the beef and pork complex but the current situation reflects much more powerful forces at work. As we noted a few weeks ago, the situation in Europe remains very significant for the global economy at large.

At this point few expect the Euro currency to just roll over and die but there is a broad consensus that the common currency will drift lower for a bit longer. Markets are clearly demanding that European governments rein back spending. Greece was the first to adopt a series of measures that will reduce government spending on a number of programmes and other high debt countries are expected to do the same. This may be all nice and good for those that have lent money to these countries but it does pose a threat to economic growth for Europe as a whole. Germany may be a strong economy but part of that strength is due to its ability to export to other countries in the EU. Good, bad or indifferent, government spending in Europe is a significant part of the economy and reducing its role via budget cutbacks, will be a long term and politically challenging undertaking.

But returning to US livestock markets, there are two issues we want to point out. First, seasonally prices for beef and pork tend to soften a bit going into June as much of the Memorial Day purchases likely have been completed. It will be particularly interesting to see what happens with pork prices, especially given the recent weakness in the Mexican peso. If ham prices start to soften, it will not bode well for hog prices in July and August. Second, watch out for chicken supplies, especially if we see further declines in grain prices.