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The market appears overbought and vulnerable to a significant set-back if there is not progress on poultry exports to Russia and China soon as poultry could start to clog the pipeline. Traders have shrugged off talk of poor retail and restaurant demand on the East Coast and also talk of building poultry inventories in the US due to trade disputes. As a result, any new news to end the Russian dispute with US poultry is not likely to provide much support. There has been some progress this week and Russian agencies have invited the US to send a delegation to Moscow as soon as they like to begin a second round of talks. April cattle closed unchanged on the session yesterday after choppy and two-sided trade. The market managed an early rally to the highest level since June 12th before drifting lower on the session. While the weather has disrupted supply and could cause lower than expected production in the weeks ahead, traders are getting more nervous over potential slower demand due to storms and higher alternative meat supply and these demand factors may have limited the buying support. Average dressed steer weights for the week ending January 30th came in at 836 pounds as compared with 855 pounds last year. Beef production for the same week came in at 485.5 million pounds, down 2.4% over year ago. Slaughter that same week was down just.3% so we can see the significant impact on production in years in which weights are lower. Traders see a further drop in weights for the first two weeks of February which may help provide some underlying support due to the tighter supply. Weights typically fall sharply in March and remain in a downtrend into May. However, demand is a growing concern for the market and traders will continue to monitor the beef market for clues on demand. Boxed beef cutout values were up 43 cents at mid-session yesterday and closed 40 cents higher at $139.17. This was up from $138.71 a week ago. Prices have remained mostly steady in a period of declining supply in the last month. The estimated cattle slaughter came in at 121,000 head yesterday. This brings the total for the week so far to 481,000 head, down from 489,000 last week at this time and down from 498,000 a year ago.

TODAY’S GUIDANCE: Watch for a technical sign of a near-term top. April cattle still has an upside objective of 92.40 but closed poorly yesterday and traditional technical indicators are at overbought readings. There is some resistance at 91.60 with 90.60 and 90.20 as support.

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The market seems to be trying to avoid the Russian poultry situation, but this will be a difficult task. US broiler producers are expanding as evidenced by “eggs set” data for the most recent week showing the largest increase over the previous year since early 2008. A 2% increase in poultry production may not usually be a big deal, but this is happening at the same time that the export market has lost its largest customer, Russia, which represented 23% of total US poultry exports from January to November 2009. Russia has effectively banned US shipments of poultry by banning meat treated with too much chlorine. And as of February 12th, Russia is also banning meat imports from specific plants, including a North Carolina turkey operation, and plants from Brazil and Finland. Traders continue to believe that the bans will be lifted soon, as soon as Russia sees the need for more imports. April cattle closed slightly higher on the session yesterday after choppy and two-sided trade. A bounce in beef prices and ideas that cattle weights will decline due to the recent poor weather lent support. Snow/rain in the plains is expected to cause muddy feedlot conditions, which could stress cattle. A lack of cash trade (and direction) this week in the southern plains has helped keep the trade choppy. The estimated cattle slaughter came in at 121,000 head yesterday, which was a little bit below trade expectations. This brings the total for the week so far to 370,000 head, down from 374,000 last week at this time and down from 372,000 a year ago. Boxed beef cutout values were up 34 cents at mid-session yesterday but closed 15 cents lower at $139.78. This was down from $140.47 a week ago and the lowest level since January 6th. The most recent Commitments of Traders report (as of January 26th) showed the market in an overbought condition with the non-commercial traders (funds) and the combined non-commercial and non-reportable positions both at record highs. For that reason the market looks vulnerable to increased speculative selling if support levels are violated.

TODAY’S GUIDANCE: While cattle have the supply fundamentals to see a rally into the spring, the short term situation is bearish, as high open interest, fund positioning, meat export interruptions, potential curtailments in bank commodity trading and the potential for China continue to follow a “tightening path” are all factors which might spark a short term sell-off. April cattle resistance comes in at 89.95 and 90.27. Look for resistance to hold and for a continued downtrend, with 88.20 and possibly 87.47 as next downside targets.

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The market is overbought and has absorbed significant new buying from funds and speculators recently but increased fears of a build-up in meat supply if exports slow has helped spark the long liquidation trend of the past few sessions. The cattle market pushed lower yesterday after choppy trade early in the session as the news of a tightening supply from the supportive USDA cattle-on-Feed report from Friday failed to provide for much support. Buyers are on the sidelines as traders remain concerned that domestic poultry supply will gradually swell due to the loss of exports to Russia and that the increased domestic supply will cause beef and pork values to slip. The estimated cattle slaughter came in at 124,000 head yesterday. This was down from 129,000 last week and down from 126,000 a year ago as this time. Boxed beef cutout values were up 23 cents at mid-session yesterday and closed 19 cents higher at $143.40. This was down from $145.71 a week ago. Cash cattle in Texas traded $.50-$1.00 higher on the week Friday at $86.00 and with feedlot supply at a seven year low; the short-term supply outlook is somewhat supportive. Placements of cattle onto feedlots in December were the lowest for the month since 1998. In addition, feedlots moved more cattle off of feedlots in December than expected at 103.5% of last year which means there were less cattle on feedlots to start the year and this was supportive to the February contract. Traders have assumed that the poultry trade with Russia would be resolved quickly but when talks broke down on Thursday with no progress, the market saw reason to sell. Ideas that the market is overbought and talk that the bullish USDA report was already priced helped pressure. The COT reports for the week ending January 19th showed an aggressive buying trend from fund traders. Trend-following funds (hedge funds) bought 17,181 contracts to increase their net long position to 56,558 contracts, a new record high for the data which has been released since January of 2006.

TODAY’S GUIDANCE: Once there is a stronger feeling that Russia will resume poultry imports from the US, the market will be in a position to move higher. However, futures remain vulnerable to a short-term sell-off. Given the overbought condition, new buyers might wait for a significant technical correction before entry. April cattle resistance comes in at 90.42 with 88.92 and 88.20 as next key support levels. Look for more weakness ahead.

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The market seems to have posted a near-term low this week for the February and April futures while August has consolidated near the 87.00-88.00 range. The lack of a sell-off in beef prices this week and the move to the highest level in eight months for beef prices has helped to provide support and leaves cash and futures prices looking undervalued. February cattle closed higher yesterday and near the highs after choppy and two-sided trade as strength in the beef market helped support. Cheaper grain prices were seen as a bearish development for June and deferred contracts which closed under some pressure. The surge higher in beef prices is expected to drive packer margins wide enough to spark higher trade in the cash market in coming weeks. Texas cash cattle traded $.50 higher to $85.50 yesterday and this helped support the February futures as well. Beef exports for the month of November came in at 172.6 million pounds, up from 135.9 million the previous year but down near 4 million pounds from October. The estimated cattle slaughter came in at 127,000 head yesterday. This brings the total for the week so far to 379,000 head, unchanged from last week at this time but up from 359,000 a year ago. Boxed beef cutout values were up 79 cents at mid-session yesterday and closed 48 cents higher at $145.43. This was up from $139.45 a week ago and up to the highest level since May 28, 2009. We would believe cash cattle are likely to trade higher next week unless there is a sharp break in the beef market.

TODAY’S GUIDANCE: Packer demand for live inventory should turn strong with the beef rally and short-term bulls might concentrate on the February futures for now.

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In this update, we will concentrate on a few longer-term strategies for key markets for the coming year. All of these strategies are designed with limited risk and to the trader stay in the positions for an extended period, to be able to take advantage of longer-term nature of these moves. The presence of widespread global recovery expectations is going to facilitate even more fund interest in commodities into 2010. Periodic attempts to reign in inflation through the use of rising interest rates could cause the equity markets to chop around in 2010, as opposed to the very impressive uptrend pattern they exhibited in 2009. With rising rates also serving to make bonds and fixed income investments less desirable, commodities might become even more attractive in 2010. Therefore, traders should look to historically cheap commodities, to commodities with strong demand, and especially to markets that are small enough to be dramatically impacted by an influx of capital.

In looking forward, we see a major slide beginning in the US Bonds and the Yen, with the prospect of significant gains in orange juice, corn and cattle. We expect some rather significant price swings in these markets over the next 9 to 12 months. In general we are operating under the assumption that the global economy is set to recover, but we also think that US growth could end up being a little stronger than the anemic predictions that were being embraced by many markets as recently as the end of October.

In addition to the prospects of fundamental changes, we also are seeing some classic technical signals calling for big moves in the coming months. We are using strategies designed to

1. provide lower, defined costs,
2. offer leverage potential and
3. present an extended time horizon for the “big picture” developments to unfold.

Furthermore, by utilizing multiple units of the enclosed strategies, we hope to capitalize on partial moves by banking profits on a portion of each trade while holding the balance of the positions for an extended period. The idea here is that it would help us increase our resolve to hold out for an even bigger reward.

We admit that these strategies might have some flaws, the most prevalent being a lack of liquidity that could make them difficult to execute. Given their out-of-the-money nature, it could take significant moves for them to turn profitable, and without a significant move in the right direction it could be difficult to exit the trades. On the plus side, the trades generally have a defined risk, and in the event that our predictions are correct, the out-of-the-money options should become more liquid. Finally, one should not forget the potential benefit of holding a multiple positions in the face of favorable, big-picture market reactions.

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The hog market fits some of the criteria listed in the introduction for this letter, but buying deferred options is very difficult and the June futures have already priced in a 17% increase in price from February to June. Therefore, we will consider another type of strategy for the hog market into 2010. February hogs have some room to run higher, and we may look to enter on a corrective break. On the other hand, cattle is a market which should do much better in 2010, with the August contract worth considering as a position trade as long as traders are patient and enter the multiple bull spreads on a break into the end of this year.

Pork production from the 4th quarter of 2009 to the 1st quarter of 2010 is expected to show its steepest drop in six years. In addition, the decline in pork production from the 1st quarter to the 2nd quarter is expected to be close to the second largest in history (2008 was the largest). This situation is likely to be a positive force for June 2010 hogs. The larger than normal “shifts” in production into the first half of the year indicate that stronger than normal seasonal strength should be seen just ahead. The market continues to climb a wall of worry. It remains in an uptrend off of the early August lows despite continued talk of a seasonal setback in ham prices into the holiday season. Pork cutout values have surged to their highest level since October 7, 2008. The jump in product prices is supporting high packer margins and helping to improve the cash market outlook. With the higher margins, packers are interested in moving as many hogs through the pipeline as possible. This is a factor which should help keep producers current with marketings and help keep average weights and production down into the holiday period. Traders remain concerned with the potential for a 2-3 week seasonal period of weakness just ahead, but with production expected to shift to a lower level into the first quarter, the break may be shallow.

In general, cattle demand has been very poor into late this year, as a shift towards lower-priced poultry and pork by consumers has pressured beef prices. In addition, restaurant demand is down, as corporate holiday parties are being cut back sharply and consumers are trimming budgets. These factors continue to keep demand slow, and this is causing cattle marketings to slow and cattle to sit in feedlots for a little longer than expected. The decline in production into the 1st quarter is a little less than normal, which could mean that the seasonal support to prices will not be as strong as normal. The jump in production into the 2nd quarter is higher than normal. However, the USDA currently shows a decline in production from the 2nd to the 3rd quarter for the first time since 1996, so longer-term position traders might concentrate their buying efforts on the August 2010 cattle contract.

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Corrective breaks into the holiday season led by long liquidation selling in livestock futures or in commodity futures in general could be a good buying opportunity for cattle. The market is expected to see a string of several months in a row starting with November in which placements onto feedlots are slow. This could cause a tightening of supply; especially into the spring and summer months. Demand has been the primary bearish force for the market but with more and more signs that the economy is recovering, beef demand is expected to stabilize soon and begin improving into 2010. Ideas that placements during November were slow and that this could support less feedlot cattle in April and May helped support the spring contract months this week. For the USDA report for release after the close today, traders see placements down as much as 13% with most estimates near an 8% drop and some estimates looking for very little drop at all. Marketings are mostly expected to be up 1-3%. This could leave on-feed supply higher than last year for the third month in a row. However, with a tighter calf crop into next year and a low placement trend, the supply outlook appears supportive into 2010. In fact, the USDA projects beef production for the 1st quarter to be down 1.8% from last year. Production in the second quarter is expected to be down just slightly and then a drop of 2.2% from this year for the third quarter of 2010. February cattle closed lower with a quiet inside trading session yesterday as weakness in hogs and other commodity markets sparked some light long liquidation selling. Demand concerns persist and the break in the stock market added to the negative tone. Weekly US beef export sales for the week ending December 10th came in at just 4,500 metric tonnes as compared with the prior 4-week average of 7,800 tonnes. This is the lowest weekly total since the week of July 2nd. Cumulative sales for the year came in at 490,600 tonnes vs. 522,600 last year by this date and 788,300 by this date in 2003. The estimated cattle slaughter came in at 124,000 head yesterday. This brings the total for the week so far to 489,000 head, up from 459,000 last week at this time and up from 466,000 a year ago. Boxed beef cutout values were up 49 cents at mid-session yesterday and closed 17 cents lower at $138.77. This was up from $134.79 a week ago. Average dressed steer weights for the week ending December 5th came in at 853 pounds, up from 852 the previous week and down.35% from a year ago. The 5-year average weekly weight for that week is 841.8. Beef production for the same week came in at 500.4 million pounds, down 3% over year ago.

TODAY’S GUIDANCE: February cattle buying support comes in at 84.02 and 83.60 with 85.60 and 86.60 as next upside targets. Look for a supportive report.

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In retrospect, 2009 was a very impressive year for the commodity markets. For most of the year commodities were seen as “the” place to be, with many analysts touting them as a new and potentially sustainable investment class. Indeed, certain commodities forged very impressive rallies in the face of highly uncertain economic conditions, with the Continuous Commodity Index forging a gain of more than 30% from the end of 2008 to the October 2009 highs. If one also takes into consideration the low to high rally in crude oil prices of 74% and the 94% run-up in sugar prices, it would seem like certain commodities are well on their way to pricing in a recovery.

With the sharp, surprising run-up in equity prices of 67% off of the March 2009 low, there are a number of analysts who view the equity markets as pricing in positive growth for 2010. While the outlook for the economy remains very suspect as of this writing (and many traders might consider the commodity markets as overstating the recovery potential), a bit of historical perspective will lead one to conclude that many commodity markets still have significant upward potential.

In our opinion, a large portion of the commodity price gains that were forged in 2009 were simply a rejection of severely deflated pricing. In some cases markets fell to (and even below) the cost of production and did so off of sentiment that suggested demand was going to fall to depression type levels and not recover for years.

But as the situation was so extreme (interest rates approaching zero, widely accepted expectations for a continuous deflationary spiral and, for a while, little or no hope of an end to the crisis) the conditions that had sent prices to extreme lows in 2008 and early 2009 may not be repeated very soon. It could be very difficult for markets like natural gas, crude oil, sugar, cotton orange juice, copper, coffee and corn to return to the lows they have forged over the last 18 months. And while markets like cocoa, soybeans, soybean oil and wheat may seem to lack the fundamentals that would allow for strong upside price extensions again in 2010, against a backdrop of a falling Dollar, fairly consistent global demand growth and ongoing investment flows toward commodities, even those “weak horses” could catch some spillover support.

One could say that 2009 was a year to “close your eyes and buy everything physical.” In contrast, 2010 looks like a year to be more selective. To be sure the direction of most commodity prices will still be largely a function of the direction of the economy, but while we have to assume that the US will slowly claw its way out of the sub-prime disaster, we have to be aware that there will likely be periodic setbacks.

However, never in history has the US Federal Reserve been so forced into a position of erring to the side of inflation. Adding into the equation what appears to be a long term devaluation of the Dollar and unprecedented quantitative easing by the most of the world’s central banks, one is presented with a spectacular, classic inflationary setup for commodities.

Picking up Where We Left off Ahead of Sub-Prime

Certain players maintain that steep commodity price gains in the 2000 to 2008 time frame were artificial, or they maintain that many of the highs made during that time were irrational and not really a reflection of fundamental conditions. But even before the new millennium arrived The Hightower Report often warned of an impending wave of “Boom and Bust” pricing in commodities, as we realized that decades of disinvestment would expose the world to periodic instances where demand would overrun supply.

On the other side of the coin, we also recognized that old ways and opinions die slowly and that many commodity producers, traders and even analysts would attempt to apply old, historical pricing to the new commodity era, which in turn would foster a movement to attempt to limit investment in commodities. Those in favor of regulation to limit such investment in commodities suggest that fund buying is exaggerating price levels in many commodities and must be stopped. If we could call an end to globalization, rising global standards of living and improved diets, it would make sense to limit investment toward commodities, but as it stands the markets need more investment and more supply.

Some players point to the late 2009 rally in soybeans as a rally that was unjustified by “the fundamentals” of the soybean market. Perhaps it should be said that soybeans were not following the old soybean market fundamentals but instead soybeans were following the new fundamentals of rampant Chinese demand, probably the biggest inflationary threat seen in the modern era. While soybean prices might be expensive relative to expectations for a big crop from South America, they might not be as expensive in the context of tight world corn supplies and in terms of the deflated Dollar.

Some players now want to call an end to the globalization wave despite, the fact that hundreds of millions of individuals in the developing world are poised to move into the middle class. The sub-prime disaster may have temporarily derailed the stellar growth in developed countries, but the rapid acceleration in standards of living in the rest of the world will not be easily denied. And while the recent price gains have come a long way towards repairing the lack of investment in mining and oil exploration and production, global commodity demand looks to continue to grow, right along with the biggest explosion of capitalism in the history of mankind.

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When we see a period of uncertain slaughter ahead of a storm, beef prices would typically push a bit higher as the pipeline quickens so end users have enough supply on hand in case of slow production. The opposite was true ahead of this storm system as sellers were active in beef and cash markets but buyers pushed to the sidelines. Restaurant demand remains very slow and the traditional buying for holiday parties is down sharply from recent years. Consumers appear to be tightening their belts and paying down debt instead of celebrating and this is having a significant impact on beef demand. Meat demand has shifted to pork and poultry as movement in these areas has been active. Cash cattle traded at $$78-$79 in Nebraska from $80-81 last week and Kansas cattle traded $1.00-$2.00 lower to $80.00 and were bid at $79.00 late in the day which was seen as a bearish development. Talk that Kansas cattle sales included two-week delivery and that some of the cattle would be shipped to Texas for processing was also seen as a negative development. Texas cattle traded $80.00, down $3.00 from last week. February cattle closed sharply lower on the session and moved to new lows and briefly under 82.00 yesterday as compared with 85.82 as the December high. Continued weakness in beef prices and lower trade in the cash cattle market sparked another round of long liquidation selling yesterday. Many traders thought that the weather in the plains might spark some better demand for live cattle and maybe some higher demand to move beef ahead of the storm. However, talk of weaker restaurant demand and selling in most other commodity markets helped pressure. The estimated cattle slaughter came in at just 97,000 head yesterday as plants were closed or on shorter shifts. This brings the total for the week so far to 334,000 head, down from 369,000 last week at this time and down from 356,000 a year ago. Boxed beef cutout values were down $1.21 at mid-session yesterday and closed $1.22 lower at $135.37. This was down from $139.59 a week ago and the lowest beef price since October 12th.

TODAY’S GUIDANCE: The market is searching for a low enough level to entice new demand but demand news continues to worsen and speculators were still holding a net long position in the last COT report which leaves the door open for long liquidation selling. With cash at $80.00 or weaker, February still seems to have some downside potential. Resistance comes in at 82.75 with 81.55 and 81.00 as next support.

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The market remains in a consolidation over the past three weeks and fears that consumer demand would take another step lower helped drive the market to the low end of this consolidation in Friday. However, cattle, the stock market and many other markets saw these fears as overblown and the market is now near the high end of the 3-week range. December cattle has stayed weak into the delivery period as fears of hefty deliveries similar to October helped to pressure. The bulls are hopeful that consumers may shift to a little more beef into early December after poultry and pork specials into Thanksgiving. Bears are concerned that higher beef prices this week could slow beef demand from the consumer. February cattle pushed slightly higher on the session yesterday finding support from short-covering and a continued firm tone to the beef market. Traders remain negative based on ideas that beef prices will slip, but beef is still coming in higher than last week. There is apparently some hope that cash cattle will trade firmer this week on ideas that last week’s drop in average weights will mean tighter supply. For the estimated weekly slaughter report for the week ending November 28th, average weights were pegged at 1,300 pounds from 1,306 pounds the previous week and the actual report from last year showing average weights for the week at 1,309 pounds. Traders see cash cattle moving from Kansas to Texas this week after cash cattle traded at $85.00 in Texas last week but just $83.00 in Kansas. The Commitments-of-Traders reports for the week ending November 24th showed a mixed result from the funds. Trend-following fund traders reduced their net long position by 1,837 contracts to 7,744. However, index funds increased their net long position by 1,526 contracts to 122,296 contracts. The report news is considered neutral and positioning is not near an extreme. The estimated cattle slaughter came in at 120,000 head yesterday. This was down from 125,000 last week but up from 119,000 a year ago as this time. Slaughter came in well below trade expectations and this is considered a potential sign of weak demand from the packer for new inventory. Boxed beef cutout values were up 57 cents at mid-session yesterday and closed 20 cents higher at $141.63. This was up from $139.18 a week ago.

TODAY’S GUIDANCE: Near-term cash market news and near-term technical signals are mixed. We have a slight upward bias but would stand aside for now. Price action on Friday may have set the low end of the current trading range for February cattle near 84.75 with 86.35 and 86.77 as resistance.

TODAY’S MARKET IDEAS: Look for a recovery bounce but not a lot more.