MORNING LIVESTOCK REPORT By Dennis Smith
Follow me on Twitter @denniscattle
Thursday May 28, 2020
Cutout took a hit with loins and ribs, for the first time, setting back off their highs. The processing cuts are actually starting to grab hold as foodservice demand begins to re-emerge. So, the processing margins eased off but they remain historically wide, historically profitable. The narrowing margins does not translate, automatically into lower futures IMO. Many in the industry are bearish, citing the prospect that packers will soon be running at 90%. OK, this means we’ll be looking at a 7%-8% reduction in production and we’ll be backing animals up indefinitely. Not sure how this is bearish. The bottom line is always production. Production is on the decline. Sows are being culled at an aggressive pace which should be clearly evident in a bullish hog & pig report next month.Finally, Brazil is having real issues with COVID-19 and it’s now starting to disrupt their packing industry. This will further disrupt both pork and perhaps more importantly beef production. We’re talking world-wide shortages of protein in the weeks ahead. I remain bullish the discounted lean hog futures market.
Cattle staged an impressive rally yesterday on rising open interest. LC open interest was up 1800 cars on the action yesterday. Cattle are probing toward resistance in the fall contracts and we’re in the process of working out of bullish option positions, taking profits. We’re doing this not so much because we’re bearish but simply because of the vast uncertainty that lies ahead. When will placements, which have been held back for two months, surge upward? Which deferred contracts will this impact. Of course, when we assumed these positions near the lows, we actually had no idea the huge backlog of cattle would likely persist for the remainder of this year. Initially I thought any backlog would be resolved by the end of summer. That’s not going to be the case. What’s happening in Brazil is bullish toward U.S. cattle prices. Specifically, I’m expecting resistance in the June contract approaching 10600. There’s a gap above 11200 that likely will NOT be filled, IMO. Resistance in the Oct can be expected from 10300-10400 which is our sell/liquidation zone. Resistance in Aug FC can be expected from 13800-14000.
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