The Hightower Report

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The short-term trend looks to remain down over the near-term, but the downside may be somewhat limited as futures already hold a decent discount to the cash market, and global economic growth and “less fear” of a slowdown in global growth could provide some support if exports remain strong. Exports represent nearly 20% of the total pork production. Weekly slaughter should continue to climb, and is already at the highest level since April and should post highs for the year in early December. October hogs closed slightly higher on the session yesterday, but down 120 points from the highs. The pit trade has closed in the vicinity of the lows for five sessions in a row. Weakness in the cash market and ideas that slaughter will continue to increase in the weeks ahead helped to pressure. The market pushed lower and matched Friday’s lows and the lowest level since August 17th, but a lack of new selling interest and a strong recovery in financial and metal markets helped provide some underlying support. There was some buying based on the steep discount to the cash market, and the move over Monday’s highs activated buy-stops and the market surged to sharply higher on the day into the mid-session. Cash hogs came in steady to $1.00 lower; about as expected in some locations but higher in the west. The estimated hog slaughter came in at 408,000 head yesterday, which was lower than expected and could be showing a weaker demand tone from the packer. Traders are a bit nervous that demand will not keep pace with the rising seasonal supply into the 4th quarter, and that this could back-up some animals in the country unless exports can remain strong. This brings the total slaughter for the week so far to 819,000 head, up from 815,000 head last week at this time but down from 868,000 head a year ago. The CME Lean Hog Index as of August 27th came in at 83.89, down 47 cents from the previous session and down from 84.13 the week before. This leaves October hogs at an 875 point discount to the cash market. Pork cutout values released after the close yesterday came in at $91.23, down $2.03 from Monday and down from $96.74 the previous week. This is the lowest pork value since August 16th, and pork values are down 5.7% from last week’s all-time high. Loin prices were down sharply and rib prices fell $9.12 to $123.51, which may be a strong indication that retailers are done booking product for weekend sales.

TODAY’S GUIDANCE: The technical action remains weak, and the COT report showed fund traders holding a net long position of near 48,000 contracts, so some additional long liquidation selling is still possible if support is violated. Next support for October hogs comes in at 73.97 and then 72.10, with 75.20 and 75.97 as resistance.

TODAY’S MARKET IDEAS: The market looks vulnerable to more fund trader long liquidation selling over the near-term.

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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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Big profits from the packer and the discount of futures to the cash market should help to provide some temporary support to the market, and the lower than expected slaughter pace for the past month along with suspicions that export demand remains strong are additional supportive forces. October hogs pushed sharply higher on the session yesterday, and held on to those gains to close strong. Cash hogs traded steady to $1.00 higher, as compared with trade expectations for steady to lower trade. This occurred late last week as well with traders looking for weak packer demand and lower cash on Thursday and Friday, but the cash trend and the pork cut-out value trend continues to support strong packer margins which leaves packers with the incentive to pay up in the cash market. Cash hogs are expected to trade steady to $0.50 lower for today. Packer demand has been stronger than expected. The spread between the pork cut-out and nearby futures is at the highest level since August of 2008, when China buying drove pork values to the previous record high before pork rallied to a new all-time high on Friday. The higher pork trade late Friday supported the early strong gains today. Pork cutout values released after the close yesterday came in at $97.79, up $2.30 from Friday and up from $91.19 the previous week. However, a later release of the cut-out from the USDA showed cut-out up 18 cents to $95.67. The adjustment down is still a record high, but the market remains nervous of a seasonal peak in pork values and a seasonal increase in production for the September to November timeframe. The CME Lean Hog Index as of August 19th came in at 83.78, up 1.01 from the previous session and up from 82.92 the week before. The estimated hog slaughter came in at 410,000 head yesterday. This was up from 407,000 head last week but down from 422,000 head a year ago as this time. Slaughter has been coming in below trade expectations for the past several weeks, and traders see part of the reason for the decline being due to too much heat in July and August which can slow weight gains. Pork production for the week was down 7.1% from last year, and this helped to support the market last week.

TODAY’S GUIDANCE: With a new high in pork cut-out, new sellers might be tough to find and short traders are vulnerable to covering. Look for support for October hogs at 77.47 and 76.70, with 78.75 and 79.30 as good resistance.

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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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October Hogs are already down as much as 522 points off of Monday’s contract highs, with much of the break coming yesterday and overnight. Ideas that the high pork values of the past few weeks will eventually cause a significant decline in demand helped to spark the selling, and long liquidation selling from speculators was the added force to drive the market lower. The market pushed sharply lower on the session yesterday, as funds turned active sellers early in the day based on weaker cash markets and fears of a minor bump in near-term supply during a period of weaker demand. Cash markets were lower than expected yesterday, and there was a perception that the market has become overbought recently. The short-term supply could jump due to sharply higher grain prices, and this helped drive the market sharply lower even though corn prices moved from sharply higher to lower on the day. August was trading at a significant premium to the cash market and when cash hogs traded steady to $2.00 lower on the day, selling became active. Cash markets are called $2.00 lower for today. Ideas that the Midwest may be too hot next week to move hogs added to the negative tone, as traders see the possibility that producers will want to move those hogs this week ahead of the heat. The CME Lean Hog Index as of August 3rd came in at 85.12, up 59 cents from the previous session and up from 81.80 the week before. The estimated hog slaughter came in at 402,000 head yesterday. This brings the total for the week so far to 1.548 million head, down from 1.565 million head last week at this time and down from 1.588 million head a year ago. Pork cutout values released after the close yesterday came in at $90.63, down 85 cents from Wednesday but up from $89.38 the previous week. Actual US pork production for the week ending July 24th came in at 393.9 million pounds, down from 403.2 million pounds the previous week and down 3.2% from a year ago.

TODAY’S GUIDANCE: Follow-through aggressive selling yesterday, after a key reversal from a contract high for August Hogs on Wednesday, is seen as a bearish factor and confirmation that a significant top is in place. October hog selling resistance comes in at 76.85, with next support back at 74.72.

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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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Strong export demand and forecasts for lower production over the next month or so could keep the hog market well-supported, despite some disappointing cash market prices over the past week or so. August hogs managed an abrupt about-face yesterday, forming a key reversal to the upside. We recall that it was a sweeping reversal DOWN last Friday that appeared to set the negative tone to the market earlier this week. Yesterday’s rally erased all the losses since that reversal, as the market traded to its highest level since July 2nd. The move was helped along by bullish export data, as the USDA reported US pork exports for May totaled 362.8 million pounds, up from 352.7 million in April and 306.9 million a year ago. Exports claimed 22.4% of pork production in May, the highest percentage since June 2008. The stronger stock market also lent support, and the weaker dollar improves the export outlook. The CME Lean Hog Index as of July 12 came in at 78.65, down 40 cents from the previous session and down from 80.43 the week before. The estimated hog slaughter came in at 404,000 head yesterday. This brings the total for the week so far to 1.195 million head, up from 1.164 million a year ago. Hogs are not getting much support from the cash pork market. Yesterday’s cutout values, released after the close, came in at $81.15, down 97 cents from Tuesday. While this was up from $80.99 the previous week, it was their second lowest level since April 12th. Feeder Pig imports from Canada for the week ending July 3 came in at 65,787 head, down from 67,603 head the previous week and below the 4-week moving average of 77,519. Feeder pig imports for the year have reached 2.4 million head, down 10.3% from last year. Total hog imports reached 84,470 for the same week, down from 86,415 the previous week and below 4-week moving average of 96,847. Cash hogs are expected to trade steady to lower today. Some scheduled plant closings Friday and Monday could keep packer demand lower over the next few sessions. The monthly export data that was released yesterday was for May, which is a significant time lag. While that was bullish news, a better indicator of how export movement is going might be cash pork prices, which includes the daily cutout and individual cuts such as loins. If the recent trend of lower pork prices reverses, it could provide a more current indicator of improving export demand.

TODAY’S GUIDANCE: Yesterday’s reversal to the upside outdid Friday’s sweeping reversal to the downside in both scope and volume. Initial upside targets include retracement levels at 82.05 and 82.775, and eventually the June 22nd high at 85.10.

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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.