Lean Hogs posted new lows for the December and February contracts on Monday. Most deferred contracts ended the day holding their ground. The pork cutout fell $1.09 due to losses spread out between hams, bellies, and butts. Perceptions that export demand has slowed due to the rising US dollar were also a factor. The trade does not want to know or at least ignores the fact that the US dollar has actually fallen against the Japanese Yen. That makes US pork cheaper for our largest customer.
Seasonally slaughter hog levels have not peaked. We are monitoring when supplies compared with year ago levels start to slip. Last week's 3% higher kill was a bearish surprise for the trade.
For trading Allendale will respect the renewed downtrend by bear spreading futures.
Technically the downtrend is back on track for Lean Hogs. Allendale's next projected major turn day for Lean Hogs is November 5.
The spread trade idea Allendale recommends is to Buy 1 June /Sell 1 February at 1700. Risk to the trade to 1550 with an objective of 2000. We are still holding the option trade that was put on September 5 when we Sold 1 December $72 call at $2.20. It settled at $0.05 on Monday and we feel it will expire worthless.
The Live Cattle trade is pretty sure feedlot numbers on today's show list counts will be lower than last week. Today's 115,000 head kill was under the 124,000 head expectation among private analysts. Packers dropped the kill by 9,000 head in response to tightening margins.
On Friday we estimated last week's packer return before fixed costs applied was $169 per head. With summary reports from USDA released today we compute that at $129 per head. Fixed costs are estimated at $150 to $175.
While lowered packer production levels are a concern for cattle feeders (lowered kill levels) we view this as a response to tight feedlot numbers. The Dow has spent five days away from the 8000 level. This may instill some confidence in the cattle trade. We are not sure how much live cattle can rally from here, but can suggest this market has found some near term lows.
Technically the trend is now sideways. Allendale's next projected major turn day for Live Cattle is tomorrow. At this time we recommend standing aside the market.
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