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A recovery in loin prices late yesterday and ideas that supply will tighten ahead helped to support the strong action overnight. In addition, traders believe that livestock markets are likely to attract increased interest from fund traders this year as a weaker dollar and a firm global demand for protein remain a positive force. In addition, pork exports hit a record high in November (total and to China) and China buyers are back from holiday this week. Trend-following fund traders (non-commercial less index funds) were net long just 13,296 contracts as of January 24th and this is down from 57,697 contracts in late October. Index fund are net long near 85,000 contracts and have been net long as much as 127,379 contracts. April hogs closed slightly lower on the session yesterday but well up from the early lows, which came in right on the day session opening. The market pushed moderately lower on the session in early trade but held support above Friday’s lows. February hogs also pushed lower early yesterday but held above last week’s lows. Cash hogs traded mostly $1.00 lower as packers appear to be cutting back on the slaughter pace for hope of improving margins. However, the cut-back is a short-term negative demand force as packers are able to buy all the hogs they needed at lower prices due to the reduced slaughter pace. Packer margins are deep in the red after persistent weakness in pork product last week and a bounce in cash hog values. Loin prices were down to $91.41 late last week from $98.71 one week previous. The CME Lean Hog Index as of January 26th came in at 87.35, up 59 cents from the previous session and up from 85.27 the week before. The estimated hog slaughter came in at 406,000 head yesterday, which was below trade expectations. This was down from 427,000 last week but up from 381,000 a year ago as this time. Pork cutout values, released after the close yesterday, came in at $83.91, up 65 cents from Friday but down from $85.27 the previous week.

TODAY’S GUIDANCE: Perhaps pork product prices might show some recovery this week when China buyers are back from holiday. Loins jumped late yesterday to help spark a recovery. The downside looks limited for April futures and we would not rule out an export/fund led rally into the spring.

TODAY’S MARKET IDEAS: April hog support is at 87.25 and 86.90, with 88.10 and 89.37 as resistance. Watch for choppy to higher trade with 90.42 as objective.

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So far, 2012 has seen a better than expected chain of events than might have been expected at the end of 2011, as Euro zone fears have tempered slightly, there have been indications that China could be in the process of shifting away from a tightening stance, and US economic activity has continued to give off signs of forward progress. Certainly the floating of surging European debt will be a long, drawn out affair that could at any time serve to yank the rug out from under the markets, but so far the take-down of their debt has gone favorably. It is possible that the markets are starting to settle on the idea that Greece might be allowed to fail and in turn be forced from the EU. While that event will most certainly foster significant volatility, it could end up being the de facto end of the Euro crisis. On the other hand, with even a moderate improvement in macroeconomic conditions in the Euro zone, it could become increasingly more difficult to spark full-blown anxiety events, and that more than anything could speed the crisis toward a favorable outcome. Recent suggestions from the US Fed seem to indicate that the US will remain supportive of the global economy, even in the face of improvement in the job market and, more surprisingly, even in the face of an increase in near term inflationary pressures. In other words, some members of the US Fed are acknowledging the severity of the Euro zone crisis, and they are apparently willing to increase the risk of inflation pressures in the US in order to facilitate a return to global stability.

From a physical commodity market perspective, it might not take much forward movement in the global economy to see many commodity prices rally in 2012. We would suggest that commodity markets in general have already seen a healthy liquidation of speculative long positions (as can be seen in a chart of the composite non-commercial and nonreportable net long positions for non-financial commodities). Therefore, we think that the risk to longs in markets like silver, copper, platinum, rice, cocoa, natural gas, and soybean meal might be somewhat limited in the months ahead.

Traders should not underestimate how important China is to several physical commodity markets. In addition to their possible shift to an easier monetary policy stance, China will also have a noted impact on commodity markets that receive fresh demand from restocking efforts. Those include corn, soybeans, sugar, cotton, copper and pork. In the near term, the best leading indicator for many commodities might be the action in the Shanghai stock market, which appears to have managed a bottom with the action in early January. If the equity market action isn’t convincing enough to declare a turn up in the Chinese economy, one might simply look back to China’s four record monthly coal import readings over the last year as evidence that their economy has retained its capacity for forward motion.

So far, 2012 has seen a better than expected chain of events than might have been expected at the end of 2011, as Euro zone fears have tempered slightly, there have been indications that China could be in the process of shifting away from a tightening stance, and US economic activity has continued to give off signs of forward progress. Certainly the floating of surging European debt will be a long, drawn out affair that could at any time serve to yank the rug out from under the markets, but so far the take-down of their debt has gone favorably. It is possible that the markets are starting to settle on the idea that Greece might be allowed to fail and in turn be forced from the EU. While that event will most certainly foster significant volatility, it could end up being the de facto end of the Euro crisis. On the other hand, with even a moderate improvement in macroeconomic conditions in the Euro zone, it could become increasingly more difficult to spark full-blown anxiety events, and that more than anything could speed the crisis toward a favorable outcome. Recent suggestions from the US Fed seem to indicate that the US will remain supportive of the global economy, even in the face of improvement in the job market and, more surprisingly, even in the face of an increase in near term inflationary pressures. In other words, some members of the US Fed are acknowledging the severity of the Euro zone crisis, and they are apparently willing to increase the risk of inflation pressures in the US in order to facilitate a return to global stability.
From a physical commodity market perspective, it might not take much forward movement in the global economy to see many commodity prices rally in 2012. We would suggest that commodity markets in general have already seen a healthy liquidation of speculative long positions (as can be seen in a chart of the composite non-commercial and nonreportable net long positions for non-financial commodities). Therefore, we think that the risk to longs in markets like silver, copper, platinum, rice, cocoa, natural gas, and soybean meal might be somewhat limited in the months ahead.
Traders should not underestimate how important China is to several physical commodity markets. In addition to their possible shift to an easier monetary policy stance, China will also have a noted impact on commodity markets that receive fresh demand from restocking efforts. Those include corn, soybeans, sugar, cotton, copper and pork. In the near term, the best leading indicator for many commodities might be the action in the Shanghai stock market, which appears to have managed a bottom with the action in early January. If the equity market action isn’t convincing enough to declare a turn up in the Chinese economy, one might simply look back to China’s four record monthly coal import readings over the last year as evidence that their economy has retained its capacity for forward motion.

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The pork market seems to be stabilizing at a higher level but the market continues to see increasing supply into November as a factor that could spark a weaker trend in the cash market into November. The real question is whether there will be an active export market for US pork to help absorb some of the excess. October hogs are trying to hold on to a hefty premium to the cash market so it will be important to see steady to higher pork cut-out in the days just ahead to justify a further advance. December hogs closed just 5 points higher on session yesterday, which was down 85 points from the mid-session peak. Hog futures saw a bounce after choppy to lower trade early led by the December futures. Traders see the corn market sell-off as a factor which might spark some expansion in the industry and this sparked some selling in the late 2012 contracts but buying upfront. As producers hold back gilts, the short-term supply of hogs available for market could tighten some. Cash markets were steady to $1.00 higher, which helped to provide some support. In addition, a bounce in pork values late Monday added to the positive tone. Weakness in economic sensitive commodity markets and a sell-off in cattle helped contribute to the late selling. Like cattle, the hog market saw active buyers overnight and higher prices with “less” macro economic fears. The CME Lean Hog Index as of September 30th came in at 91.30, up 22 cents from the previous session and up from 90.92 the week before. The estimated hog slaughter came in at 421,000 head yesterday. This brings the total for the week so far to 851,000 head, down from 853,000 last week at this time but up from 839,000 a year ago. Pork cutout values, released after the close yesterday, came in at $98.31, down 1 cent from Monday but up from $97.41 the previous week.

TODAY’S GUIDANCE: The market seems a bit too overbought and the premium a bit too high to attract increased speculative buying in this environment unless there is a steady flow of positive news from the pork cut-out, which would be a sign of active export demand. The premium structure is a concern for the bulls and the market is in a short-term overbought condition. New buyers might wait for a more significant pull back.

TODAY’S MARKET IDEAS: December hog support comes in at 86.85 and 85.65, with 89.50 as the next target. New buyers might wait for set-back.

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Rumors of China buying more US pork has helped to drive the market sharply higher in the past week and some strength in pork product prices this week is helping to support active buying from speculators. Funds were noted buyers again yesterday and October pushed to the highest level since August 16th overnight. Pork cutout values, released after the close yesterday, came in at $95.72, up 88 cents from Tuesday and up from $94.96 the previous week which is the highest pork value since August 31st. Loins have recovered to $113.80 from $109.60 on Monday. With strong margins and what looks to be better short-term demand (maybe export), the cash market has traded steady to higher this week in spite of the hefty near-term supply. October hogs closed sharply higher on the session yesterday, and the market has now recovered more than 50% of the losses for the August 2nd to September 6th break. The market pushed higher again led by the October contract as firming cash and product prices leave a positive tilt to the pork market. Cash hogs traded steady to higher, and this added to the positive tone but the steep jump in hog weights has raised some concerns that a few hogs may be backing up in the country. Weekly average weights for Iowa/Minnesota for the week ending September 10th came in at 267.2 pounds, up 3.7 pounds from the previous week but still down from 268.1 pounds last year. Fund buyers were active, and this helped to drive the market sharply higher and strength in cattle added to the positive tone. The CME Lean Hog Index as of September 12th came in at 86.10, down 33 from the previous session and down from 90.86 the week before. This leaves October at a stiff premium to the cash market and October normally trades at a $2.00-$3.00 discount at this time of the year. The estimated hog slaughter came in at 425,000 head yesterday. This brings the total for the week so far to 1.274 million head, up from 851,000 last week at this time and up from 1.238 million a year ago. China pork prices hit a record high for the 5th week in a row and as a key driver for inflation; this has implications for China import activity for corn and/or pork. If China increases import activity in the months just ahead, this could ease supply concerns and support the US market during a seasonally weak time frame.

TODAY’S GUIDANCE: It is odd for October to take a big premium to the cash market at this time of the year, and this might limit the advance. December hog short-term support is at 84.42 and 83.37, with 85.62 and maybe 86.85 as next key resistance.

TODAY’S MARKET IDEAS: February hog buying support moves up to 88.32 and another close over 89.10 would leave 90.42 and 94.22 as next upside objectives.

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The collapse in pork cut-out values is helping to drive cash markets down quickly and the outlook for increasing supply ahead is helping to cast a negative tone on futures. The discounts may help to provide some underlying support but traders see the relatively high price as a significant obstacle to absorb the rising supply. The lack of excessive heat has allowed weights to recover quickly and trade supply psychology is negative. Monthly exports are reported about six weeks after the fact so it will be several more weeks before knowing July exports. China rumors of more aggressive imports began in July. October hogs closed slightly higher on the session yesterday with quiet trade. December and February hogs were moderately higher as the negative cash news was less of an influence. Talk of a short-term oversold condition of the market and ideas that cash bellies might stabilize soon helped to support. Cash hogs traded steady to $1.00 lower yesterday but the discount of futures to cash helped to support. Cash is called $1.00 lower for today and the steep drop in pork might cause packers to pull back even further. The sharp set-back in pork product prices late Wednesday helped to limit the advance. Pork cutout values, released after the close yesterday, came in at $102.11, down $1.93 from Wednesday and down from $106.93 the previous week. This is the lowest it has been since July 26th, when it was $101.31. Loins were higher but ribs and especially bellies were sharply lower. Bellies were down $7.21 to $119.43 as compared with $147.74 earlier last week. The CME Lean Hog Index as of August 23rd came in at 102.14, down $1.03 from the previous session and down from 106.49 the week before. The estimated hog slaughter came in at 413,000 head yesterday. This brings the total for the week so far to 1.662 million head, up from 1.650 million last week at this time and up from 1.642 million a year ago.

TODAY’S GUIDANCE: The weakness in pork and the steep downtrend in cash have the longs nervous despite the stiff discount of futures to the cash. This could spark another round of long liquidation selling soon. Given the importance of pork to the China economy and inflation, we would not be surprised to see active buying by China on further weakness. In addition, lower pigs per litter this summer might show up as smaller than expected slaughter into the first quarter. Poultry production is also on the decline. As a result, it is difficult to get too negative.

TODAY’S MARKET IDEAS: The next good support for February hogs is at 85.07, but the charts still look negative and we can not rule out a continuation of the recent downtrend to 84.05. October hog support is 86.75 and then 84.95. Look for choppy to lower trade just ahead.

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While Warren Buffett thinks the US economy is stronger than the Federal Reserve does and rail car loadings in the US have remained fairly strong, Washington continues to undermine rather than help the economy. Just as the GOP-controlled House showed no desire to forgo their current 5 week vacation, the President, when asked if he would call Congress back early, indicated that was last thing he wanted to see. Clearly any politician worth their salt makes sure their message includes concern for the economy and the need to create jobs, but apparently the people with jobs (primarily those in Washington) don’t seem to have a real sense of urgency.

In our opinion, a recent serious decline in a private consumer sentiment reading highlights the ongoing negative drag spilling out of Washington, and that in turn could increase the difficulty in turning the US economy around quickly. With the early start of the 2012 Presidential campaign by the major political parties last week, it is safe to assume that the Super Committee (when they get around to convening) will continue to face an extremely partisan environment. With US leadership unable to settle the ultra critical debt/spending debate, one might also expect any effort to put together tax reform or a stimulus package to be a very, long-drawn out affair. In the mean time, some members of the Fed have become so negative toward the economy that one of them recently suggested that the Fed will probably won’t have to raise interest rates until sometime in 2013. In other words, it could be years before any tightening is undertaken!

Equities and certain physical commodities showed the capacity to rebound last week, but the coming three weeks might see the stock market sending a definitive message to US leaders that something real has to be done to reduce the US debt load; otherwise investors could begin to flee US equities and the US Dollar.

While markets like cattle, pork, corn, gold, silver and platinum should be able to stand up to noted weakness in US equities, a sharp slide in the US Dollar could provide an added lift for commodities with positive or strong fundamentals. Given a combination of even more slowing evidence from the US economy and a resumption of political rancor in Washington, the dollar could easily make new lows for the year. Some analysts think that “business as usual in Washington” will prompt threats from US credit rating agencies and perhaps even some heat from China, Europe and or the IMF.

In the event that the global community is forced to exert pressure on the US to act, it could result in the dollar falling back toward the 2008 lows! In other words, one should not be surprised to see the Dollar react as if something worse than sub-prime is threatening the United States!

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Two agricultural markets which might do well in the aftermath of the current financial crises, the downgrading of US credit and the European bank issues are corn and hogs. Neither market is low-priced, but the fears of weakening global economies in Europe and the US and that the slower growth might drag the rest of the world into a double-dip recession may have held these markets down. Once the smoke from the financial crisis clears, we could be in a more inflationary environment, at least for commodity markets. The US debt issues could spark a weakening US dollar. This might re-convince investors around the world to hold real assets like commodities instead of paper assets, especially markets that have solid supply/demand fundamentals, particularly if US demand stabilizes and China stays on a soft-landing but solid growth path. Corn and hogs are two markets which could feel the effects of a sharp increase in China’s import activity into 2012.

If it were not for the debt crisis, the outlook for declining world demand for commodity markets and the “extra” selling that the market needed to absorb due to the “risk-off” psychology, corn prices might have already challenged $8.00.

Extreme Heat in July Cuts Corn Yield Prospects

The August 11th USDA Crop Production and Supply/Demand Reports were the first surveyed reports of the year. In the report, corn production came in at 12.914 billion bushels, which was 168 million below trade expectations and down 556 million from last month. Average yield was pegged at 153 bushels per acre, compared with trade expectations at 155.5 and last month’s estimate of 158.7. While planted acres were left unchanged, harvested acres were revised down by 500,000. US ending stocks for 2011/12 season were pegged at 714 million bushels, which was 37 million below trade expectations and down 156 million from last month’s estimate. This results in a stocks-to-usage ratio of 5.4%, which is the second lowest on record (since at least 1960). Beginning stocks were adjusted higher by 60 million bushels, and along with the lower production, the USDA lowered feed usage by 150 million bushels, ethanol usage by 50 million and exports by 150 million. Any further reduction in yield next month will leave the market in a position of “needing” to move to a higher price level to ration demand.

With crops in Illinois rated 50% good to excellent versus 64% last year, traders are questioning the USDA’s current Illinois yield estimate at 170 bushels per acre, especially since their yield last year was only 157. Since 1975, there have been 18 years in which the USDA lowered its production forecast in the August report. In 14 of those 18 years, the USDA made another adjustment lower in the September report.

Also in the report, world ending stocks were adjusted lower to 114.5 million tonnes from 115.7 million last month, which was already a 5-year low, and from 122.9 million tonnes last year. World stocks/usage is now estimated at just 13.2%, which is the lowest since 1973.

While the USDA report news is certainly a bullish, there are several factors which would argue that the situation may get even tighter ahead. Primarily, the USDA might be underestimating the impact of the July heat wave on corn yields; it might be underestimating China’s demand; and it may have left China’s production forecast too high. The USDA’s forecast for Chinese corn production is at a record high 178 million tonnes, down from 173 million last year and 158 million two years ago. But with 15-20% of the China’s corn growing areas reportedly under stress, production could be adjusted lower by 3.5 million tonnes or more in future reports. The USDA left corn consumption in China unchanged at 182.5 million tonnes, but there are plenty of reports that suggest the need for China to expand its livestock production, which would require corn consumption for feed to move higher.

The devastating heat in July across the heart of the Corn Belt will likely be a major factor in determining final yield. Study after study from universities in Illinois, Iowa, Nebraska and others point to the correlation between high nighttime temperatures and below-trend yield. Weather and rain amounts in August are important in determining final yield, but to believe that US yield will be higher than last year runs against most of the research on the topic.

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The heat blast across the Midwest over the past two weeks seems to be taking a toll on production and the surge in pork values to another record high overnight should help to boost packer margins. These are also factors expected to support higher cash markets into next week. Pork cutout values, released after the close yesterday, came in at $102.34, up $1.03 from Tuesday and up from $99.43 the previous week. Again, this is a new all-time high. Another jump in loin prices and firm ham values supported the cut-out. August hogs closed higher on the session yesterday and managed to push to the highest level since April 20th. The market managed to rally in the face of a weaker macroeconomic tone and weakness in the cattle market. The cash hog trade in the Midwest was as much as $2.00 higher and traders see a steady to higher trade again today. Weekly average weights for Iowa-Southern Minnesota as of July 23rd came in at 263.7 pounds, down from 266.6 the previous week and down from 268.4 pounds last year. The sharp drop in weights is seen as a factor which will cause pork production to come in below expectations. Some traders indicated that pork prices in China softened this week, and that could be a factor that reflects a modest shift in demand away from higher price pork for cheaper poultry. This was said to be the first weekly decline in hog prices since April. China has issued new measures to help fight inflation focused on pork production and pork storage in hopes of stabilizing pork prices and inflation. Local governments are urged to increase their reserves of pork to near a 10-day supply. Given the China short-term supply situation, we would not rule out more pork purchases from the US. The CME Lean Hog Index as of July 25th came in at 98.67, up 1.17 from the previous session and up from 95.13 the week before. This leaves October at a significant discount to the cash market but an $8-$10 discount at this time of the year is not uncommon for October futures. The estimated hog slaughter came in at 406,000 head yesterday. This brings the total for the week so far to 1.206 million head, down from 1.223 million last week at this time but up from 1.166 million a year ago.

TODAY’S GUIDANCE: If fund traders emerge as buyers in hog, October could see another swing higher to the 95.87 level over the near-term, and with record high pork values and declining weights, buyers might turn more active. August hogs may remain in an uptrend short-term as the market follows the cash higher.

TODAY’S MARKET IDEAS: August hog support comes in at 100.72 and 99.87, with 103.15 and 103.97 as next objectives.

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