Saturday, July 24, 2010

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Update #228

For Cow/Calf Producers (as recommended July 10):  With the recent rally in November feeder cattle and the increasing feed cost with the rally in corn, feeding margins and cattle crushes are currently at historical low levels. Here’s what is needed to correct the current crush margin status: Feeder cattle will have to move lower, live cattle prices will need to move higher, or a combination of both. We recommend you get the balance of your un-hedged 2010 calf crop hedged during the current rally. We recommend one of the following positions to lock in hedges:

·       Purchase the November Feeder cattle $110 put for $2.60 or less 

·       Purchase a straddle option position by buying the $114 November put and selling the $120 November call at $3.00 or less. 

·       Place targets to sell the November futures at $116.45, a retracement near the contract high of April.

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--  This Week’s Key USDA Report  --

The USDA Cattle on Feed Report was released this afternoon, showing 10.070 million head on feed as July 1, 2010. This is 3% above 2009 and within the pre-report estimates.  Placements were reported at 1.628 million head, up 17% from 2009.  Although this placement number seems cumbersome, it is below the average pre-report estimates.  In addition, last year’s placements were at historic low levels. This type of June placement number is consistent with the 5-year average.  We view this number as neutral and possibly positive to the deferred months.

The June marketing number was 1.997 million head. This was just slightly above last year’s levels.  Pre-report estimates for marketings were forecasting close to a 2% increase. This July Cattle-on-Feed report is viewed as mostly neutral.  The lower-than-expected marketing numbers could pressure the front months in early trade on Monday, with the back months supported by the lower-than-expected June placements. 

Cattle Inventory

The USDA released its semi-annual Cattle Inventory report today. It illustrates the continuing decline in the US cattle herd.  All Cattle and Calves were reported at 100.8 million head, down 1% from last year. This is the smallest US cow herd since 1973.  The 2010 Calf Crop is estimated at 35.4 million head, down 1% from last year, and the smallest calf crop since 1950.  Total Beef Cattle inventory was reported at 31.7 million head, 2% below last year. 

Cold Storage Report

(CME Group) CHICAGO -- Total meat and poultry stocks on June 30 amounted to

2.019 billion pounds, 0.8% lower than on May 31 and 11.6% lower than one year earlier. This marks the 11th month in a row and 16th of the past 17 months in which total frozen meat and poultry stocks have been lower than one year earlier.

The past 9 months have been at least 10% smaller than year-ago levels. As can be seen in the chart, sharp reductions of chicken inventories in early 2009 were the primary catalyst for the sharply lower frozen stocks. But rapidly declining pork inventories are keeping the declines large so far in 2010.

Pork led all species in the size of both month-ago and year ago inventory declines     in June at –7.3 and –23.3%, respectively.  It is quite normal for pork stocks to fall in the summer months as slaughter and, usually, average market weights decline but this year is the sharpest such decline on record except for the export-driven drawdown of 2008. The largest contributors to declines versus June 2009 were bellies

(-35 million lbs.), unclassified (-27.5 million lbs.) and other pork (-26.2 million lbs.).

June 2010 bellies stocks were down 44.5% from last year. Ham stocks, however, were  only 3.4% lower than one year ago. The inventory of no wholesale cut category increased during June. Bellies were again the unit leader (-35.1 million lbs.) in June stocks reduction while bone-in loins (-35.2%) and picnics (-35%) saw the largest monthly declines in percentage terms.  Pork stocks on June 30 were at their lowest level since August 2004 in absolute terms. As a percentage of monthly pork production (the blue line in the lower chart), the June 30 inventories were 23.0%, near the bottom of what has become the “normal” range since 2001.

Chicken inventories were slightly larger on June 30 than they were one year ago but were 3.4% smaller than last month. Of particular interest here were stocks of leg quarters and leg quarter items such as drumsticks, thighs and thigh meat — items that are usually dependent on export markets such as Russia.

We are aware of no news of actual shipments heading to Russia in spite of the agreement reached in May on using disinfectant treatments other than chlorine and the ballyhooed intervention by President Obama a few weeks back. In spite of that continued roadblock, total stocks of  leg-quarter products declined in June by 11.5 million pounds or 6.4%. At 182.22 million pounds, though, they were still 48.2% larger than one year ago. Stocks of breasts and breast meat declined versus both one month ago (-9.4%) and one year ago (6.4%). Wing inventories were 18.9% larger than last year but down 4.5% from May.

Turkey stocks continued their usual seasonal buildup at a relatively normal pace. June 30 stocks were 9.1% larger than at the end of May but were 5.3% smaller than one year ago. Whole bird (-11.9%) and unclassified turkey (-15.3%) led the year-on-year decline.

Frozen beef stocks were 1.5% lower than on May 31 and 12.9% lower than one year ago, led by boneless beef stocks at -12.8%.

                                  CME Group/DLR

CATTLE Update

Chart of the Week: CATTLE

Source: DTN/ProphetX

August Live Cattle closed the week $1.03 higher on better cash and beef market trade this week.  Support on the August now stands at $92.80, with resistance at $94.25.

Cash markets were firmer this week. Most of the cash business was done on Thursday with the south trading at $95, up $1 to $2 on the week.  Dressed trade in the north at $150 was steady with last week.

The beef market closed mixed on Thursday with choice closing 24 cents lower at $155.28, while select closed 25 cents higher at $146.75.  Demand has been better than expected over the last two weeks with some retailers again finding inventories at lower than comfortable levels, which has led to a supported beef market.  Seasonally, beef and cash markets trade weaker this time of year.  The stronger beef and cash markets over the last two weeks are supportive for the futures markets.

Heat hits the southern Plains: The heat over the last two weeks has caused greater-than-normal death losses in Kansas and Oklahoma.  Estimates of death loss in Kansas due to the high heat and humidity are now over 3000 head.  We will also be monitoring the slaughter numbers and weights over the next few weeks. We expect the high temps to reduce weight gains and slow the progress of the cattle in those areas.

Now the numbers:

Where You Should Be: CATTLE

Cow/Calf Producer :  Producers with 2010 Calf inventories that will move to market between Nov 10 and Feb 11 should have a minimum of 50% of the calf crop hedged on previous recommendations of puts, synthetic puts or fence positions.  

Backgrounding/Grazing: Due to the high replacement costs currently priced into the feeder cattle market, we have been recommending for several months to backend all purchases as the inventory is bought. 

Feedlot: Producers finishing cattle should have hedged all production that will move to market thru the end of September. These floors should have been put in place by using puts, synthetic puts or fences. At this time we want to be patient in making any additional sales.

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HOG Update

Source:DTN Prophet X

This chart is December Lean Hogs. Over the last couple days the market has rallied on optimism in the export front. There is a discount to the cash, as always, due to the fact we usually have more than adequate supplies in the Fall. I don’t know if or when they can break out to a new high but if I was needing coverage for this time period and had nothing it looks like at least getting started would be good business.

National base: $79.46, up $5.58.

Cash hogs have had nice gain this week after a very lackluster trade last week. As we have said many times this year: Cutout is and will be the cash driver. Last week cutout was very choppy in comparison to gains every day this week. One thing often overlooked by the producer is retail meat pricing. We have now set two consecutive monthly highs for pork. June retail prices were $3.10, surpassing the $3.04 record set in May. Beef is also staying very near its highest levels ever, supporting the whole complex.

Slaughter numbers for the week look to fall short of 2 million head. We should be moving into some larger numbers in the next 3-4 weeks, bring slaughter back to the 2.1 to 2.2 million range. One thing helping keep the numbers down is that the Canadian slaughter numbers are down; the exchange rate is working against them.

Cold Storage for pork showed the largest declines of all meats. Supplies normally shrink in the Summer, but this is the second largest decline on record. Stock are at the smallest level since 2004 and with current production we look to keep our supply the demand margin as small as ever.

Now, the numbers:

Where You Should Be: HOGS

Farrow-to-Finish: Farrow-to-finish operations or those of you in a weaned pig system should have some type of coverage for all head currently on feed.

Finishing: Feeder pig buyers will need to look at each group’s profitability and manage risk accordingly. You can use a variety of strategies to place floors with upside, or use a more simple method of packer contracts or hedges to establish a price. If you have been following our recommendations, you should have some type of downside protection as groups went on feed.

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POULTRY Update

In brief...

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FEED Update

All feed needs are covered for the first, second and third quarters of 2010. 

Our 2010 Price Average to date:

·       Cost of corn: $3.78/bu

·       Cost of soybean meal: $280/ton

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