As we have repeatedly voiced, commodities are in a bull market, but prices will not go straight up. Furthermore, the smart money moves from sector to sector; rotating from one sector to another when the fundamentals change, technicals swing, weather shifts, or even in some instances seasonally. We feel that in addition to the agriculture and softs markets, the livestock markets i.e. live cattle, feeder cattle, and lean hogs could be at the beginning of a historic run to much higher prices.

Cattle

A cheap dollar, expensive grain and the growth in demand of world protein should continue to promote a strong environment for exporting cattle. The surge in grain and fuel prices for cattle operators has pushed producers out of the business as well as helped temporarily cause more short-term production. While this has kept short-term supply relatively high, future production could be more limited due to fewer players within the marketplace.
 
Low placements in the spring, gradually improving exports, a sharp drop in imports and the outlook for declining supply ahead, are all key bullish fundamental forces for the market looking forward. Elevated corn prices in June motivated cattle feedlot managers to reduce placements, which were down 9.0%. Small placements in the months of March to June should cause beef supplies to drop sharply in the September to December period. The low value of the dollar has discouraged imports and encouraged US beef exports. The fact that the first shipments of US beef in 4 years arrive in Korea this week should also support. During the January to May period, beef imports dropped by 22% and beef exports surged by 34%. We hate to be so elementary, but it really boils down to supply and demand.

Generally cattle prices make their summer lows in late summer and begin to move higher by late August or September. The traditional end to outdoor grilling season (Labor Day) can temporarily deplete grocer stocks just as the return to school and the approach of cooler weather can increase retail beef consumption. Past performance is not indicative of future results. For the last 4 years feeder cattle have attempted a run to and through the $120 level and failed sometime between August and October. We believe that 2008 is the year where we get through that level and reach record highs. For October feeder cattle the 100 day moving average comes in at 112.50 and we will be adding length for clients as long as that level holds on the board. October live cattle have been consolidating around the 50% Fibonacci retracement level for the last week or so in what we expect to be a pause before the next leg lifts prices back to $110-112. The current market is oversold, stochastic and MACD support a move higher and as long as last week’s low of 103.80 holds, we like being long.

Lean hogs

Pork has remained cheap in the US for quite some time but we feel that’s about to change.