The general tone in Live Cattle was stronger Monday on the fat cattle end. Friday's Cattle on Feed Report was a little supportive as Placements were only reported to be 5.7% higher, instead of the average guesses of 9% to 10% higher. The idea the trade is supporting, is that this will be one of the last months of higher Placements and numbers will be lighter from now on into the summer and fall. Allendale agrees with this logic and we look for production to be higher this spring and summer, then fall to below last year levels as we move into the fall and winter. You will note that deferred contracts are all in up-trends, while the nearby contracts are just treading water. For the big picture, we feel the higher production in the summer should at best equal last year's prices and most likely prices will be lower than last year for the June and August timeframe. That implies the June contract is $5 overvalued and August contract is $3 overvalued.
We are not changing our long-term bearish view in the hogs. We still feel the June through December 2008 contracts are overvalued. They are holding big premiums to last year's prices, when in fact pork production will be higher than last year from now through at least September. Given a better export picture than last year we could look for those contracts to equal last year's prices at the very most. Summer contracts around $75 and $76 will likely be $70 at best and mostly likely a bit under $70 by expiration. The change we are noting is we are revising our opinion of the nearby contracts, with some new information. Last Friday USDA released the monthly Cold Storage Report, which we feel held some bad news for the Pork Complex. In the previous three months of this over-the-top production period, demand had been very impressive, while it was clear that pork production ran at ridiculous levels. It is interesting to note even though pork production was much higher than normal from October to December, we did not add any more pork into storage than we usually would. The new numbers, covering the month of January, shows that pattern has changed. We threw a bunch of pork at the market again and instead of taking it like a champ, we doubled the amount of pork typically going into storage. If cash hogs continue to have trouble, as it appears they will, we will note April could get down to $58. That would mean speculative traders still holding short $60 puts would need to exit.
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