Still higher than expected slaughter levels on top of a weakened demand is the story of the day in the hog market. Last week wholesale pork prices fell a moderate 63 cents. On Monday the cash pork market fell an additional 54 cents. There is a moderately lower trend developing. It is not unusual for pork to flounder a little at this time of year. Cash pork and cash hog prices typically don't start their higher run into summer until mid April. Our current thought is $58 for a downside target on the April. On the deferred contracts we continue to note they are overvalued by a good deal. There is nothing wrong with them implying higher prices than right now. Supplies tighten and demand increases in the summer. Our problem lies in the premium 2008 contracts hold to 2007 levels. Demand will have to be massive to overcome the larger pork production levels that are set through September. On the liquidation issue, if you must be bullish based on the idea massive liquidation is/will be happening then do not think at all about buying any 2008 contracts. There is no reason to be buying October or December based on liquidation hopes. Any big liquidation will affect pork production 10 months later. If liquidation picks up in March it will affect production in early 2009. In the big picture it still appears the trade will hold these unrealistic premiums to 2007 levels until each contract gets closer to its expiration.
We have made this point before that both fed and feeder cattle have surprisingly not reacted to recent gains in corn prices. That changed on Monday. Though near term beef related news is bullish (higher cash cattle and wholesale beef) the trade is turning back to corn. Big gains in corn increase the cost of feeding cattle in feedlots. Feedlots are already losing good money on each head and may start marketing cattle early (they have not yet done so). The other change is that it could limit future placements, which reduces future production. This supports far deferred contracts. On the feeder end there is a direct inverse relationship with corn. Without a top in corn there appears no reason why feeders will not retest their January lows ($99.30 on the March and $102.70 on the April). If corn tests $6 then a $100 April feeder contract would be very realistic. On the export side a Smithfield beef plant included some beef that was not ordered to a Japanese buyer. This backs up our idea there will be no deal for expanded beef trade for at least the next six months. Allendale's biggest concern with CME pricing is with the June contract. We may have to wait for the month of May or so, but feel the June contract will be $90 or sub-$90 near its expiration. We are still not worried about downside for the second half of 2008 futures.
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