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Livestock Angles: Beef demand could be thorn in rally side
Originally published in the October 30, 2009, print edition.
— The livestock markets have improved, for the most part, over the past few weeks.
Cattle have had the best performance as they have rallied to levels we haven’t seen in weeks, while the hog market has seen moderate gains. The heavy cattle that have plagued the market during the early portion of October appear to be cleaning up nicely which leaves the show lists smaller without the burdensome overfed cattle.
With the market-ready cattle at the smallest numbers of the year and the beef cutouts drifting higher toward the $140 per hundredweight level basis choice, the likelihood of a continued rally from the supply side seems possible at this juncture.
The thorn in this whole scenario becomes the demand for beef. The question will become can the beef cutouts move appreciably above the $140/cwt. level basis choice and keep the volume in the boxes enough for the packer to maintain a decent profit margin.
Without the demand for beef products, the rally will be short-lived and disappointing in magnitude. The past few weeks have seen a large increase in commodity fund activity which has had a great deal of influence on the cattle market since the majority of the activity has been on the buy side.
If these funds decide to liquidate these positions it could have an adverse effect on the price through the futures market. Therefore producers should be cognizant of market conditions and use extreme strength in the market to lock-in profits if and when they are available.
The hog market has struggled over the past several weeks. As live prices moved higher, the opposite was happening with the pork cutouts which were slipping in value.
This has forced the packer to become more defensive in his bidding for inventory and subsequently cash prices in turn began to slip. Numbers are still plentiful and weights are still high which has kept total pork production high. As evidenced by the latest cold storage information, there is plenty of pork in storage.
If demand does not increase in the near future, it will be difficult for the hog market to sustain any long-term rally in prices. A question also will be the public reaction to the H1N1 virus and the effects on demand worldwide which would impact our export business.
As with the cattle, the hog futures have seen a large increase in the commodity fund activity which has been mostly on the buy side. If these funds decide to liquidate this could have an adverse effect on the futures market prices. With the pork cutouts still range bound at this point, and ample supplies of animals, producers should be using the current premiums available to lock-in inventories.
Joe Teale is a commodity broker for Great Plains Commodity in Afton, Minn.
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