by Dennis Smith
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Cash was mostly $1.00 higher yesterday and not steady to down $1.00 as billed on the noon report. Packer margins have actually been restored with the hog carcass performing nicely last week. The hog carcass gained $3.87 last week and tacked on another $1.33 yesterday. Bellies are starting to rip. When the belly market gets tight wild things can happen. Open interest continues to pour into the late summer and fall hog contracts. Open interest in Aug LH jumped 1,100, Oct up 1,600 and Dec increased by 1,500 in yesterday’s action. We continue to get confirmation from multiple sources regarding the damage sustained to the Chinese pig herd from ASF. Reports recently out of Vietnam have been quiet. The latest estimate I’ve heard is that 10% of their herd may be lost which would be 3 million pigs. This is just a guess as the disease is likely still spreading in Vietnam as well as in China. The bullish situation will have a very long tail as breeding numbers have been severely depleted. Repopulation will be very slow as the disease continues to spread. Smithfield Foods is being tight lipped but as a public company they’ll eventually have to report their situation to shareholders. I’m hearing they’re rapidly retooling plants to split carcasses for direct shipment to China. Three items, if they occur, will contribute to another massive leg upward in hog prices. These are: 1) continued large sales on weekly export reports accompanied with increased shipments, 2) the removal of tariffs on U.S. pork from both China and Mexico, and 3) confirmation from the Chinese government that their ban on Payleen-free pork is removed. Final note, I’m already hearing that non-Smithfield plants are retooling to split carcasses with likely means the Payleen-free requirement has already been unofficially lifted. We’re interest in taking partial profits on June calls with our next trigger target 100.50.
Liquidation in the April continues with deliveries a factor in this trend. However, evidence surfaced yesterday that the cash steer market may have established a near term low at $1.24 last week. Prices paid Friday in the south were reported at $1.26 in KS and $1.28 in TX. Prices in the north were a solid 127-130. The show list is larger this week, estimated at 284,900 head compared to 258,900 last week and 300,500 last year. Notice how the number can’t creep up to last year as cattle have been set back severely due to the toughest winter in decades. The bullish tail from the brutal winter will be long, in my opinion. In the meantime seasonal demand is kicking into high gear and with unemployment at a near 50-year low, I’m expecting a very strong and impressive round of seasonal demand. Rising pork prices certainly won’t hurt either. Choice beef soared higher yesterday (up $2.23) reaching a new high for the spring season. Choice is gaining on select despite the vastly improved grading which is providing more prime and choice meat to the market. The chart pattern is bullish….I’m not sure how anyone can argue that point. Look for a rally and impressive upside follow through.
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