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June did not start particularly well for the cattle and hog markets. Both have had a more or less defensive start, with the futures market leading the lower charge.
The cattle market has really been two-sided, with the cash market remaining firm while the futures market has seen a large long liquidation. Most of the influence to the futures market has been the weak underlying equity and currency markets, which has forced many speculators to the sidelines. This was happening while packers were content to pay steady to higher money for live inventory because profit margins were so positive. This also reflected the fewer numbers of cattle available at the present time.
The futures market doing as it is titled reflects the anticipation of a weakening cash market due to deteriorating economic conditions, as well as an export market that could be shrinking due to the strong U.S. dollar. With the prospect of increased imports of foreign beef looming over the market, traders are becoming wary of the potential increased supply of beef that will become available in the months ahead while demand is contracting.
Beef cutouts appear to have topped and have slipped over the month from their highs over $171 hundredweight basis choice in early May.
As the cutouts have dropped, the volume in the boxed beef trade has slowly increased from a level that reflected considerable resistance by the consumer. With the consideration that more numbers will become available over the next several months, and the state of the world economies, producers should definitely approach the cattle market defensively and use rallies to protect inventories.
The hog market has suffered a similar fate as the cattle market in recent weeks. The fact that world economy problems have forced many fund buyers to exit the marketplace, has put extreme pressure on hog futures and, in turn, put a defensive posture on the cash market.
Hog numbers continue to be adequate to meet current demand, and with the pork cutouts reaching almost $90/cwt., demand for pork product was fading. The U.S. dollar has been strong and, if that trend continues, it will more than likely reduce export business, which has been the bright spot for the hog market the past few years. Numbers of animals should remain lower than year-ago levels, but the problem will be: can demand be enough to hold up current price levels into the fall months?
Considering all factors, the hog market is likely to struggle to maintain current price levels and, in all likelihood, drift lower into a seasonal low sometime this fall. Therefore producers should consider protecting inventories on any rallies through the summer months.
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Joe Teale is a commodity broker for Great Plains Commodity in Afton, Minn.
