August lean hog futures are forming a possible bull flag formation.

[Dennis Smith]

LEAN HOGS
It’s a rainy morning in Chicago. I’d say it’s perfect weather for growing corn. Hopefully the livestock producer is going to benefit from a huge corn crop and lower corn prices down the road. The USDA is already projecting pork production for 2010 to rise from earlier estimates. While I doubt this, it’s could be accurate if corn prices decline to the 250-300 range which appears very possible. I was disappointed today when average hog weights increased from the previous week by 1.7 lbs. Weights are now running 4.4 lbs above last year. This is mostly the result of great weather in the hog belt (cool temperatures) and tends to lessen the impact of tight hog supplies. Heavy hogs is exactly what the packer wants in order to maximize their operations. It works against the pork producer and will keep the cash market under wraps if it continues. July hogs go off the board today and this contract has laid an egg compared to the rest of the board. While supplies have tightened and cutout has risen for five consecutive days, packers have NOT raised their cash bids resulting in vastly improved processing margins. I’m trading the Aug hogs from the long side within my buy zone (6290-6340) risking 120 points and we’re long the Aug 65 calls from 120 points (closed yesterday at 147). Technically, Aug lean hog futures are consolidating above their 40-day moving average, likely forming what will prove to be a bull flag. A close above 6480 will target futures to 7240, filling the gap left in the wake of the H1N1 scare. I’m bullish from both a fundamental perspective and a technical outlook.

LIVE CATTLE
Live cattle futures experienced anther huge volume session on Tuesday with over 52,000 contracts changing hands. Open interest was up 4,764 with higher open interest in all contracts except the Aug. Aug futures closed higher and are currently trading above 8500 in the face of cash steer prices at 8200. The weak basis is very rare in the beef market at this time of year. The board is anticipating some bullish developments in the beef sector down the road. The choice cutout was up .58 last night with the kill reported at 126,000. Packers are interested in killing as many as possible given profitable processing margins. Currently, on-feed numbers stand at 10-year lows with supplies expected to tighten further into the fall time frame. Similar to the hogs, I’m bullish live cattle and feeder cattle futures from both a fundamental perspective and from a technical outlook. I’m trading the Oct live cattle from the long side with my spec clients.

If you’re not satisfied with your current brokerage relationship give me a call or send me an email. dennis.smith@archerfinancials.com 877.377.7905