Below is an excerpt from our most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit for your free 2 week trial!

The livestock markets seem to be probing for a price level that is low enough to account for a dramatic shift down in meat exports resulting from the international financial crises and from recessionary consumer demand in the US retail and restaurant sectors. Hogs appear to have put in a significant low this fall, but the subsequent rally seems to have come too far, too fast, especially with the futures already trading at a stiff premium to the cash market. Hog traders are hoping to see a bullish surprise from either domestic demand or from exports in order to rationalize the premium structure.

The cattle market appears to be pricing in a very bearish demand base, and the drop in poultry production for the next few months could give both cattle (as well as hog) prices a boost. Cattle traders have already priced in bearish demand across the board. The difference for cattle would be the situation in South Korea, where US beef is in a position to recover some of the market share it lost three years ago due to the Mad Cow scare. US beef prices are competitive at the retail level in South Korea, and some cash market participants believe US beef can be priced well under South Korean beef. If so, this could show up as a bullish surprise and possibly be seen in weekly export sales reports in the weeks just ahead.

Cattle and beef supply is on the decline, and this trend is expected to continue for the foreseeable future. Poultry production into the December-February time frame looks to come in well below last year, maybe down 5-7%, which could spark some overflow demand for beef and pork. The USDA supply/demand updates still show poultry production for the 1st quarter of 2009 at down only 1.8% from last year and 2nd quarter production down less than 1% from last year. Egg data suggests there could be significant revisions lower ahead, which will lower total meat production as well. However, poultry exports in 2008 were typically running about 15-18% of total production, and the collapse in the Russian economy and the weakness in other emerging market economies have left meat export estimates into 2009 tenuous. Cattle feedlot supply has seen a steady decline during 2008, and the November 1st supply was 93.2% of last year. This is the lowest on-feed supply for November 1st since 2002. With the tight supplies already expected, weather may become more and more of an issue ahead.

Feb Cattle Basis

The cattle market seems to have already priced in weak demand, with February futures trading at a $5.00-$6.00 discount to the cash market last week and speculators heavily net short. A year ago, February cattle were trading at a $5.00 premium to cash, and the 5-year average basis calls for a $1.00-$3.00 premium. Supply is tightening for beef and for all meats.

The hog market has put in a significant low in November and the cash market outlooks into the first and especially the second quarters look positive. However, the short-term overbought condition of the market and the potential lack of interest in US meat on the world market (if the economy stays weak and the dollar stays strong) could be seen as a reason to be cautious. We are a little uneasy with the idea that ham prices will be the key to rationalizing the steep premium of futures to the cash market. Pork cutout values surged last week to a 1 month peak, and the jump in ham values has been the foundation for this move. The pork cutout as of the middle of last week was $59.64, up from $56.34 the previous week. Ham values were up to $53.17 compared with $44.32 the previous week. The Lean Hog Index rallied to 53.71, which was up from 52.25 the week before. This left February futures at a premium of 11.75 points, which was similar to basis levels a year ago. Last year, futures moved down to cash instead of cash moving up to futures. While we are not turning overly negative to the hog market, the bulls are counting on a major surge in cash, and cash is moving up at a snail’s pace. Given the deflationary price environment, buyers in hogs can be patient and wait for a better technical setup. Ideally, futures traders can look to buy February hogs near 62.97 with an eventual objective near 69.55 and a stop near 61.60.

This content originated from – The Hightower Report.