MORNING LIVESTOCK REPORT By Dennis Smith

Monday, January 09, 2012 LEAN HOGS Cash hog prices were quoted fully 1.00 higher out west with prices in the eastern hog belt quoted down 1.00. Hog receipts were not heavy this week. It does not appear that animals have been backed up to any degree following the two short kill weeks in late December. Lean hog futures closed higher but not real impressive. The Feb lost on the spreads late, suggesting continued weakness. Technically, this market remains in a downtrend. The latest CME lean hog index was quoted at 8237, higher for the third consecutive day. Feb hogs are 150 over the index. Fridays kill was pegged at 425,000 with an impressive Sat kill projection of 344,000. On a holiday shortened kill we slaughtered 2.063 million hogs. The cutout was down .27 at 84.06. Both hams and loins, however, were quoted steady to firm. Bellies were not tested all week. What to Expect? Heres what Im looking to do in the hogs over the next three weeks. First, unwind the Apr/Feb bear spread and then possibly look to going the other way, establishing the Feb/Apr bull spread. Second, look at going long in the June hogs. Third, look for hedging opportunities on rallied into the middle of Jan and again in the middle of Feb. The major seasonal peak timeframe to consider major hedging then develops from early to mid-May. Specifically, my target to unwind the Apr/Feb bear spread (were in at 180 to the April) is 420 points to the April. Cash hog prices, especially out west, were higher this week, about $4.00 higher. At the same time the pork carcass lost $1.10 in value, squeezing processing margins. Typically, processing margins would never get squeezed in a period of excessive supply. Hog supplies appear to be tightening which is fairly normal for this time of year. Product is cheap. The pork carcass is the cheapest its been since January 14 of 2011. I view the pork fundamentals as long term friendly/bullish. We bought the June this week and stopped them out for a 110 point loss. I need to see a bottom form in the Feb/Apr bull spread before Ill be comfortable buying June hogs again. I expect that the Chinese will remain buyers of U.S. pork this winter. Overall export sales are expected to remain good, keeping pace with last year. Stay tuned, when it looks like a bottom well buy June hogs for a long spec position. LIVE CATTLE Live cattle futures traded two-sided but stumbled late and closed slightly lower. Three times this week live cattle futures rallied but did not hold. The cash steer trade broke loose in good volume today. TX reported cash sales at $1.21, down 1 cent from last week, KS reported trade at $1.20-$1.21, steady to one cent lower and NE moved cattle on the hot beef at $196-198, mostly $4.00 lower than last week. I would assume improving weather conditions in the south are improving grading and forcing the Midwest cash down closer to the S. Plains. Fridays kill was pegged at 132,000 with the Sat projection at

27,000. The weekly kill was 560,000. The choice cutout was down 1.20 at 190.10. Movement was average at 141 boxes and 45 trim. Choice rib beef cuts traded sharply lower this week and forced the cutout downward. This is just the opposite of what I expected. The choice cutout lost $4.63 this week. What to expect? Broadly speaking, the pulse of the U.S. economy continues to improve. However, improving feedlot conditions in the southern plains, a firming tone in the U.S. dollar and the perception that near term fed supplies will be fully adequate capped off rallies this week. Eventually, down the road, I expect very tight fed supplies to fuel a massive rally in cash, cutout and futures. But evidently not just yet. Two hazards can derail this massive rally; global economic recession and/or a major disruption in export business. If neither of these develop, cattle prices eventually will move into all-time high territory. In the meantime, with numbers evidently fully adequate for the next 30 to 60 days, Im recommending two hedge strategies as outlined below. At this time Ill not take hedge strategies beyond April. In the Feb options, purchase the 120 puts and sell 125 calls at a 100 point premium outlay. A solid price floor at a reasonable cost. The upper cap on the window is $1.25 which should be acceptable if we bottom out before expiration in just 29 days. Im guessing it will take a 50-70 point rally to get this order executed. In the Apr options, purchase the 125 puts/sell 116 puts/sell 130 calls at a 100 point premium outlay. Again, reasonable cost with excellent price floor protection from 125 down as far as 116. If one gets pinned on the short 130 calls, it means the cash steer market has rallied over 10 cents in 90 days. Wouldnt that be a good thing? As far as spec positions, we lightened the load on speculative length dramatically this week. However, from a spec standpoint, Ill be looking to re-position in the April cattle between 122-123 and in the Dec on any trade below 127. The seasonal tendencies suggest the next major low could occur in the Jan 2530th timeframe. This copy of my livestock wire is prepared each day for my clients. If you would like a free 30-day trail please send me an email or give me a call at dennis.smith@archerfinancials.com or 1.877.377.7905.
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