March has come in like a lion for the cattle market and more like a lamb for the hog market.
The cattle market has virtually exploded to the upside during the first half of March. The rally has been initiated by the futures market as speculative buying has pushed the futures to new contract highs in many months. Because of the premiums in the futures, packers were able to pay higher for inventory and lock-in the beef products through the higher futures prices.
The problems with this scenario is that the beef product is not moving any better at the current cutout levels so at some point the supply of product will overwhelm the live market and prices will have to readjust.
This buying spree by the commodity funds has been on the idea that supplies of cattle will not be enough to meet the future demand for beef. The only problem with that theory is that demand is more elastic than supply, which means that as the price for beef products advances, the demand will go down accordingly. With the economic situation still uncertain at this juncture, it is unlikely that demand will increase at higher prices.
Technically speaking, the futures markets are now in an overbought situation and are becoming increasingly more vulnerable to at minimum a correction if not establishing a spring high in the market.
One thing we most often find in any market is that the optimism is at the greatest at the high of a market and the most pessimistic at the lows. This scenario would lead one to believe that we are nearing a high in the near future. Producers should be careful at this point and maintain a perspective that if profitable at this point with current inventory, do not let an opportunity get away.
The hog market may be the example that when a commodity reached a certain level in price, demand begins to decrease in response.
As the pork cut reached the $75 per hundredweight mark, retailers began to balk and retreat from accumulating additional pork product. Subsequently, the packers were forced to back away from the market and lower their bids for live inventory.
The argument can be made here that the number of hogs are on the decline and therefore prices should be on the increase because of tighter supply. However, as mentioned above, the economic situation will continue to restrain buyers until the real improvement is seen and more income is available for consumers to spend.
It would seem that producers should take the approach of protection of inventory as their primary goal at the time and not let any profits, if available, escape.
Joe Teale is a commodity broker for Great Plains Commodity in Afton, Minn.
