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The past couple of weeks proved to be interesting in the livestock markets. The old adage of what goes up must come down certainly was at work during that time period. As the summer months approach, it would definitely feel as if the livestock markets have put in some sort of seasonal high in May.
The cattle market which was led by the futures market higher over the past several months due to strong speculative buying, went into a near-freefall as those positions were liquidated. This event was precipitated by the financial uneasiness within the European Union and particularly the Greek financial woes. This uneasiness spilled over into all markets causing hedge funds to vacate their extraordinary long positions to be pared back in most futures markets, but particularly the livestock markets.
As a result the cattle market came under pressure and the basis became positive for feedlots and they began to move their inventory at lower money to capture the positive basis on their hedged positions.
In reality the cattle market went too high given the current fundamentals effecting the market at the present time. Regardless of the numbers of cattle on feed, the economic conditions continue to weaken demand for beef as reflected in the declining volume in the boxed beef trade as the beef cutouts moved higher.
With the recent strength in the U.S. dollar, the export market, which has been fairly strong, may begin to decline while the import of beef into this country may increase. All these factors seem to point to a cattle market that has seen the highs for several months. However, with the recent dramatic slide the futures market is becoming oversold and too discounted to current cash values. This should bring about the opportunity for producers to take advantage of a rebound in the market and lock-in some inventory.
The hog market has seen a similar fate as the cattle market and has come under liquidation in the futures markets by the same hedge funds as the cattle. A similar fate has also affected the cash market as pork cutouts advanced to levels where the demand for product began to decline and the packers eased back on their bids to protect their profit margins.
With the competition between meats and the continued economic woes, despite the fact that number of hogs is contracting, the fact is that at higher prices so is demand for product. The bright spot for the hog market has been the export market and recently the Chinese have reopened the door for the import of U.S. pork. This could help stabilize the market in the weeks ahead, however, considering the overall fundamentals it is still likely that the spring high is in.
Producers should be patient and use recovery rallies to protect inventories in the fall months.
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Joe Teale is a commodity broker for Great Plains Commodity in Afton, Minn.
