The Hightower Report

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After a contract high on August 24th, October futures have closed lower for six sessions in a row and are down again overnight. Seasonal weakness in beef and cash markets along with indications that speculators hold a massive net long position, have traders nervous of a continued long liquidation sell-off over the near-term. October cattle closed sharply lower on the session yesterday, as stops were activated on the late break below last week’s lows to drive the market to the lowest level since August 18th. Traders believed that there was aggressive long liquidation selling at the end of the month, as fund traders lightened up on their enormous net long position posted in the last COT report. As of August 24th, non-commercial traders were net long 134,766 contracts. A turn up in the stock market helped to provide underlying support, and strength in the hog market added to the positive tone, but the market lacked new buying interest yesterday and retreated from the early highs. News that packer bids emerged at just $97.00 versus offers at $102.00 yesterday may have been seen as a slight negative. Nebraska cattle bids were only $96.00, as compared with $99.00-$99.50 last week. The discount of futures to cash and a lack of new deliveries helped to provide some underlying support for the early bounce as well. August cattle expired at 97.25 yesterday. The estimated cattle slaughter came in at 130,000 head yesterday. This brings the total for the week so far to 260,000 head, up from 256,000 head last week at this time and up from 259,000 head a year ago. Boxed beef cutout values were up 32 cents at mid-session yesterday, but closed 10 cents lower at $163.64. This was up from $163.60 the prior week. There were 4 new deliveries overnight.

TODAY’S GUIDANCE: We remain concerned with the massive net long position of fund traders, and the impact on the market “if” cattle become out of favor by large commodity fund traders. Outside markets look supportive today, but the selling could still increase if support levels are taken out. Close-in resistance for October cattle is at 98.05 and 98.57, with 96.67 and 95.87 as support. Uptrend channel support comes in at 96.87 today, and selling could intensify if this level is violated.

TODAY’S MARKET IDEAS: Wait for a more significant set-back to buy October or December cattle. For now, the market is overbought and vulnerable to fund long liquidation selling.

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October cattle pushed to a new contract high overnight, before slipping lower for the session. Weakness from outside markets helped pull futures back under 100, but the rally was supported by strong beef prices this week and expectations that packers will pay-up for live inventory with strong margins. October cattle closed sharply higher on the session yesterday, and closed at a new contract high. With talk of higher cash cattle trade this week and continued strength in the beef market, short-covering and some new speculative buying helped to support. Sellers for much of the past week have been waiting for a top in the beef market, and this has not yet occurred. A lack of surprises in the USDA Cattle-on-Feed report, which came out with a bearish tilt on Friday afternoon, was offset by continued strong gains in the beef market. Traders await cash cattle news this week, with offers at $102 to start the week and no bids as compared with $100 trade last week. A 12-week high in beef prices has traders leaning to the positive side for cash cattle this week, and October is trading at a discount. The estimated cattle slaughter came in at 128,000 head yesterday, which was well above trade expectations and suggests stronger than expected demand from the packer for live inventory. The surge in beef prices has helped improve packer profit margins, and this may have boosted packer demand. Slaughter was up from 124,000 last week, and up from 127,000 a year ago as this time. Boxed beef cutout values were up $1.37 at mid-session yesterday and closed $1.16 higher at $162.93. This was up from $155.62 the prior week, and is the highest beef price since June 2nd. The COT report as of August 17th showed Non-Commercial traders (funds) were net long 115,824 contracts, which is a historically high level.

TODAY’S GUIDANCE: Exports remain strong and the uptrend in beef prices remains intact, but the huge net long of the funds is a concern for the bulls. The upside break-out on record volume is impressive and with beef prices moving higher again yesterday, the market appears to be in a position to attract more buying. The market is extremely overbought, but there is still no technical sign of a peak. Support for October cattle is back at 97.90 and 97.25.

TODAY’S MARKET IDEAS: Any sign of a near-term top and/or significant weakness in the financial markets could spark a correction.

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Fund buyers have been active this week, and it may take exceptionally strong demand news or bullish outside market forces to rationalize the surge higher in prices this week. Weather is threatening to hold production down in the southern plains due to excessive heat, but the weather is a double-edged word as consumer demand is also weak when hot and humid weather persists. Boxed beef cutout values were up 20 cents at mid-session yesterday, and closed 58 cents lower at $150.69. This was down from $153.39 the prior week and is the lowest beef price since March 12th. The weak beef market should drive packer margins deeper in the red, and this may push cash cattle lower from $93.00 traded last week. This leaves October cattle at a stiff premium to the cash. October cattle managed to run higher early in the session yesterday and post new contract highs shortly after the day-session opening, before drifting lower to close moderately higher on the day but down near 75 from the highs. Funds were active buyers of cattle, even with weakness in the stock market and a sharp break in hogs. Weekly U.S. beef export sales came in at 9,300 metric tonnes, compared with the prior 4-week average of 12,400 tonnes. Cumulative sales for 2010 have reached 415,000 metric tonnes, up 33.1% from last year’s pace. The estimated cattle slaughter came in at 129,000 head yesterday. This brings the total for the week so far to 513,000 head, unchanged from last week at this time but up from 493,000 head a year ago. Average dressed steer weights for the week ending July 24th came in at 836 pounds, up from 832 pounds the previous week and down 1.3% from a year ago. Beef production for the same week came in at 513.5 million pounds, up 6.05% over year ago.

TODAY’S GUIDANCE: The weak beef market does not bode well for the bulls hoping to see higher cash cattle trade this week. Cash is likely to trade $92.00, which is $5.00 under the highs for October cattle yesterday. Trend-following fund traders were already net long over 71,000 contracts as of July 27th, and funds were active buyers this week which leaves the market overbought but still with no technical sign of a top. October cattle resistance comes in at 96.62 and 97.00, with support back at 95.12 and 94.67.

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While traders see cash cattle trading near $95.00 this week in the southern plains, August cattle closed at 92.65 so the discount may provide some support. Traders remain nervous that the aggressive long liquidation selling from fund traders seen on Monday could re-emerge as a bearish force. Funds held a hefty net long position as of July 20th basis the COT reports. August live cattle ended the pit-session near unchanged yesterday, after trading in the bottom portion of Monday’s big range-down session throughout the day. Higher equity values and even stronger boxed beef prices offered little support to the cattle market, as it was still reeling from Monday’s steep sell-off. Cash live cattle were quiet, with offers at $96, $1 higher than last week’s trade. Bids were at $94 on Monday, but there were no bids yesterday. The estimated cattle slaughter came in at 125,000 head yesterday which was below trade expectations and could be a sign of weaker packer demand. This brings the total for the week so far to 254,000 head, down from 256,000 head last week at this time but up from 252,000 head a year ago. Boxed beef cutout values at mid-session came in at $155.62 and closed at $155.23, up 0.33 for the session and up to the highest level since July 22nd. This was up from $155.10 the prior week. The market seems to be in a supply set-up to move higher, as long as demand manages to hold near current levels. Heat in the central part of the country for a few more days could keep demand sluggish. A forecast for a trough for the eastern part of the country for the next 10 days or so could help pull temperatures and humidity levels down on the East Coast, which may be seen as a positive for demand.

TODAY’S GUIDANCE: The overbought condition and the aggressive fund selling trend seen Monday are bearish short-term forces. If we see the selling trend continue into the middle of this week, the market might correct the overbought condition. A correction in October cattle to 92.65 support looks like a short-term buying opportunity, with 95.97 as the next upside target.

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While the domestic demand outlook for the beef sector has been flat, export business is looking strong, and that has allowed cattle to resume its bullish posture. Supportive psychological factors, namely stronger equity market action and a weaker dollar, have been backed up by some bullish fundamental data. Monthly export data from May gave the market its initial lift yesterday, and August live cattle traded to their highest level since May 13th after breaking out above the recent highs. The USDA reported US exports of beef and veal in May at 203.6 million pounds, up from 177.20 million in April and 160.5 million a year ago. The market was also helped later in the session by reports of surprisingly strong cash cattle sales in Texas and Oklahoma, where they traded at $94, up from $91.50-92 the previous week. This occurred despite a lower trend in cutout values from the previous week. Yesterday the boxed beef cutout was down 14 cents at mid-session and closed 48 cents lower at $153.98. This was also down from $155.62 the prior week and the lowest it has been since June 18th. The estimated cattle slaughter came in at 131,000 head yesterday. This brings the total for the week so far to 392,000 head, up from 373,000 a year ago. A heat wave that is moving into the central part of the US has been a bearish demand concern, but the stronger outside markets and now bullish fundamental data have overcome that factor. With some weather forecasters calling for this pattern to extend well into August, the demand issue could resurface at some point.

TODAY’S GUIDANCE: With yesterday’s rally August live cattle have achieved a key retracement off of the May-June break, and holding these levels could possibly set the market up for a move back to the June highs up around 95.50. A previous resistance level at 92.35 becomes support. Next resistance comes in at 93.30 and 94.275.

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While the outside markets have signaled the possibility of weaker consumer demand ahead with weak consumer sentiment and poor economic news, beef prices have inched higher for the past few weeks and reached the highest level since June 9th. This sparked a better than expected trade in the cash cattle market this week and supported the solid gains in futures yesterday. Cash cattle traded steady in the southern plains at $91.00 this week and $1.00 higher to $92.00 in Nebraska. August live cattle rallied sharply yesterday off of a surging corn market. Corn went to limit up after the Quarterly Grain Stocks and Acreage reports showed a surprising drop in corn planted acreage for this season and lower than expected stocks in storage as of June 1st. Higher corn prices add to the cattle feeding costs, and it is expected that this will cause beef production to eventually drop. This was especially supportive to deferred contracts. Also supportive was a higher stock market, although most of those gains have been pared as we moved through the session. The estimated cattle slaughter came in at 129,000 head yesterday. This brings the total for the week so far to 387,000 head, unchanged from last week at this time but up from 385,000 a year ago. Boxed beef cutout values were up 43 cents at mid-session yesterday and closed 44 cents higher at $155.56. This was up from $154.47 the prior week and is the highest beef price since June 9th.

TODAY’S GUIDANCE: Supply news is somewhat supportive and beef prices have firmed up over the past several weeks, so the downside looks limited unless outside forces remain a significant bearish force. Beef prices could push higher next week “if” the reduced slaughter provides some support, and “if” retail beef clearance for the weekend is favorable. Packer margins are still in the black, which should be seen as a positive short-term force.

TODAY’S MARKET IDEAS: August cattle support is at 89.25 with resistance at 90.40. A move through resistance might be considered an upside break-out and leave 91.40 and 92.37 as next upside objectives.

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The steady trade in the cash cattle market already this week could leave the short-term downside potential in the market limited with August cattle holding a discount to the cash market. The market saw some hedge-lifting after the cash market activity picked up. Beef prices seem to be trying to hold steady/firm in the past week but the market remains concerned with the possibility that weak demand and slower consumer beef demand from hot weather could spark further long liquidation selling from fund traders who still hold a very large net short position. Very poor housing data helped spark some of the demand concerns yesterday. August cattle closed lower and experienced follow-through selling from the reversal-type action of Tuesday. Weak US economic news, weakness in other commodity markets and a sell-off in the stock market helped pressure futures and traders see hot and humid weather into the weekend as a potential negative force for consumer demand. The discount of futures to the cash market may have been a factor to help provide some support. Cash cattle traded steady at $91.00 in the southern plains and there was talk that buyers were asking for a few extra days for pick-up. The estimated cattle slaughter came in at 130,000 head yesterday which was a bit higher than expected and could be a sign of firm demand from the packer. This brings the total for the week so far to 387,000 head, up from 384,000 last week at this time and up from 382,000 a year ago. Boxed beef cutout values were down 41 cents at mid-session yesterday and closed 7 cents lower at $154.47. This was up from $153.77 the prior week. While the heat is seen as a bearish demand force, the center of the heat moves over the plains for parts of next week and this could also have a positive influence on supply as weight gains will be slower than normal and this could help keep production a bit lower than expected.

TODAY’S GUIDANCE: A bearish demand scenario may be about “priced” into the futures market but we remain concerned with the massive net long position of the fund trader. Cattle has been following the stock market and further weakness could keep fund traders as active sellers.

TODAY’S MARKET IDEAS: August cattle close-in support is at 88.37 and a move under this support could spark another leg down with 86.05 as a downside objective. It will take a move back over 89.10 to negate the bearish technical set-up and turn the minor trend up.

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The market continues to probe for a near-term low and while outside market forces have turned much more positive on the general demand outlook, the beef market and the cash markets are still showing a weak demand trend. Boxed beef cutout values were down $1.79 at mid-session Friday and closed $1.99 lower at $153.17. This was down from $160.45 the prior week and is the lowest beef market since March 16th. August cattle tried to bounce early in the session on Friday but fell into the middle of the day and then pushed to new lows for the move and to the lowest level since February 8th. News of weak retail sales in the US helped to pressure the market on ideas that the US consumer is backing away from luxury items such as higher priced beef cuts. The discount of futures to the cash market helped support the early bounce but ideas that the steady break in beef prices will cause cash markets to fall in the weeks just ahead helped to drive the market to new lows. Cash cattle traded at $92.00 in Kansas and $93.00 in Texas last week, down about $2.00 on the week and the drop in beef prices late last week does not bode well for the cash this week. In addition, both regions indicate that there were unsold cattle last week which will show up again this week. The estimated cattle slaughter came in at 122,000 head Friday and 33,000 head for Saturday. This brought the total for last week to 661,000 head, up from 625,000 the previous week but down from 666,000 a year ago. While slaughter was down just.8% from last year for the week, beef production was down 2.8% from last year due to the lighter weights. The Commitments of Traders Futures and Options report as of June 8th showed an aggressive selling trend from fund traders which is normally seen as a bearish short-term force. Non-Commercial traders were net long 86,107 contracts, a decrease of 18,554 contracts for the week. Trend-following fund traders (Non-Commercial excluding index funds) are now net long 57,503 contracts which is down 17,695 contracts for the week. This is still seen as a hefty net long position for funds given the recent trend and new selling may get active if support levels are violated. Commodity Index traders held a net long position of 138,441 contracts, up 543 contracts for the week.

TODAY’S GUIDANCE: Given strong signals from outside market forces of a better than expected economic outlook, the oversold condition of the market after last week’s sell-off and the sharp break in the US dollar, traders can continue to monitor the market for technical signs of a low. The COT report still shows a hefty net long positions from fund traders.

TODAY’S MARKET IDEAS: August cattle appears cheap near 87.10 and it will take a move over 88.67 to spark some technical buying interest.

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A weak trend for the beef market and demand concerns remain the bearish short-term forces which sparked massive long liquidation selling from fund traders. Strong gains overnight in the US stock market may lift these demand fears, and slow or stop the fund selling for now. Boxed beef cutout values were down 50 cents at mid-session yesterday, and closed 68 cents lower at $166.14. This was down from $167.91 the prior week, and is the lowest beef market since April 9th. It will be important to see some stability in beef prices and cash cattle prices in order to ease the long liquidation trend. The cattle market closed sharply higher on the session yesterday, but had a fairly tight range (40 points in June) after the day session opening. Overnight strength in the stock market and less pressure coming from outside market forces helped boost the market early, and futures recaptured a good portion of their losses from Tuesday. Ideas that the US economic outlook could improve “if” the situation in Europe calms down helped to provide some support. The estimated cattle slaughter came in at 130,000 head yesterday. This brings the total for the week so far to 387,000 head, down from 390,000 head last week at this time but up from 264,000 head a year ago. Kansas cash cattle traded at $93.00 to $94.00, which is down $1.00-$2.00 from late last week and down sharply from early last week. Packers have one less day for slaughter next week, and this may have kept bids down. Open interest was down 3,525 contracts on the session yesterday, making for a decline of near 32,500 contracts in just 11 trading sessions.

TODAY’S GUIDANCE: Relief in selling for the equity markets could slow the long liquidation trend and allow the market to bounce. Technically, there is still no sign of a near-term low but traditional indicators are oversold and the supply fundamentals look somewhat favorable.

TODAY’S MARKET IDEAS: Key resistance for August cattle comes in at 91.20 and then 92.02, with key support back at 88.12. Look for a bounce to 92.00.

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With the overbought condition of the market and continued talk that beef prices have topped-out, the market seems to be in a position to see a short-term correction and buyers can wait for the break to buy. The stiff discount of futures to the cash market is keeping producers very current with marketings, while the high cash prices are encouraging producers to move cattle as soon as possible. If beef prices do not pull back too far from this week’s 22-month highs, the cash market could see steady trade near $100 for the next few weeks and this will eventually support June and August cattle. The cattle market closed sharply lower on the session yesterday, as technical selling emerged with talk of the overbought condition. Ideas that we will soon see a near-term peak in beef prices helped to spark the spec selling, with news of record open interest adding to the overbought concerns. Cash traded at $100 yesterday and some traders expected higher trades this week. The estimated cattle slaughter came in at 130,000 head yesterday, which was a bit higher than expected and could be seen as a sign of strong packer demand. This brings the total for the week so far to 388,000 head, up from 381,000 last week at this time and up from 384,000 a year ago. Boxed beef cutout values were up 14 cents at mid-session yesterday, and closed 35 cents lower at $171.05. This was up from $170.61 the prior week. Recent strength in the US dollar also has traders nervous that beef exports will slow and imports bounce. In the USDA supply/demand report this week, 2010 beef production was revised lower by 54 million pounds, while exports were revised higher by 10 million pounds and imports revised lower by 165 million pounds. For comparison purposes, weekly beef production in the US is near 500 million pounds.

TODAY’S GUIDANCE: The overbought condition of the market and some seasonal lull in demand ahead are good reasons to wait for a significant technical correction before entry from the long side.

TODAY’S MARKET IDEAS: Buying support for August cattle comes in at 94.12 and 93.67, with 96.45 and 97.55 as upside objectives.