Tuesday Morning Livestock Market Update - High Feed Prices Are Not Going Away

GENERAL COMMENTS:

Corn futures gained substantially over a number of reasons. The fact is that December corn closed at the highest level since June 21^st. This put pressure on the cattle complex as feed prices are not backing off as anticipated during harvest. The possibility of a rail strike came back to the forefront. This will increase the uncertainty over feed supplies to certain areas of the country which could increase corn prices and result in more cattle liquidation. Packer margins are very much lower than last year and the 3-year average which may result in packers taking steps to improve those margins. Boxed beef was lower yesterday with choice down $1.44 and select down $2.31. The Commitment of Traders report showed funds as net seller of 19,139 contracts reducing their net long positions to 42,936 contracts.

Nearby hog contracts defied underlying cash and cutouts yesterday with spread trading pushing December $2.45 higher while April and later contracts were lower. Traders seemed more willing to buy the December contract as it had closed the chart gap last week. The National Direct Afternoon Hog report showed cash down $2.75. Cash is expected to increase today as packers likely will step up to procure the hogs they need more aggressively. Cutouts declined slightly posting a loss of $0.15. The Commitment of Traders report showed funds as net sellers of 18,302 contacts bringing their net long positions to 22,827 contracts.

	BULL SIDE		BEAR SIDE
1)	Slaughter pace remains strong even though packer margins are lower. Demand needs to be met and more beef sales make up some of the difference.	1)	If the rail strike becomes a reality, feed prices may increase substantially or may not even be available to some areas triggering further liquidation of cattle putting pressure on cattle prices.
2)	Higher feed prices may keep herd liquidation high eventually tightening cattle supplies substantially.	2)	Packer margins have declined dramatically from last year and the 3-year average. They may reduce slaughter pace to drive up boxed beef prices.
3)	Only October and February hogs have chart gaps remaining below the market. October may be running out of time to fill the gap. This may provide confidence to bullish traders.	3)	October and February hog futures still have a chart gap below the market that may be filled.
4)	December is carrying a large discount to cash which may support futures if cash prices stabilize.	4)	There remains concern over the economic impact on pork demand as inflation remains high and may stay that way for a time.