JUNE 13, 2006 ADMIS AFTERNOON LIVESTOCK COMMENTARY REPT-AMR3 by Brian Brase (312-242-7095 or brian.brase@admis.com) **************************************************************************** MARKET COMMENTS Live cattle futures were higher on Tuesday, except for the June contract that continued to suffer amid falling beef prices and expectations for lower cash cattle prices the rest of this month. The other contracts were supported by export hopes, with a headline coming during today's session that said the US and Japan could finalize a deal as early as next week. That is a bit vague on specifics, but it fueled a bounce that had already been started. August live cattle futures posted a bullish outside-up day, bouncing off support of the 40-day moving average. The other supportive factor was spillover from the pork futures complex. The volume was relatively light, which has some discounting today's action with regards to its technical significance. Feeder cattle futures were higher, filling the gap left from yesterday's weak action. The close was relatively strong so some will say that a correction is done and the market can move higher. The higher feeder index and this week's bounce off the 20-day moving average is supportive to that way of thinking. However, the correction wasn't very significant, well short of a 38% retracement, and could be just the "A" portion of an ABC correction. Directionals are trending lower to favor the sell side. There were reports of lower cash feeder prices, reflecting some concerns about demand staying as strong as it has been. Lean hog futures were up sharply on Tuesday. The July contract saw limit up (the recently expanded 300 point limit) for much of the afternoon, selling off on the close due to pressure from the last of the Goldman roll (sell July buy August). Fund buying was a noted feature. Buy stops and short covering were likely triggered as futures made new contract highs. The strong cash performance is largely responsible for the underlying strength. June futures expires tomorrow and is trying to pace the cash lean index. The one-day value is at $74, but the index has been climbing over a dollar day to justify June's premium. Most expect cash prices to soften after the June contract expires, which is built into the futures structure. Talk of Japan and the US being close to finalizing a beef deal could hurt pork exports when it happens. That news likely got lost amid the active trading today, but may offer some sell pressure tomorrow. Today's gap higher looks like an exhaustion gap on the chart. Stochastics and RSI are overbought, with today's close above the upper Bollinger Band. Milk futures were higher. Higher cheese and butter prices were supportive. The August, September, and October contracts look like they may have broken out above the recent consolidating ranges to offer upside potential and encourage buyers. Any push to the upside seems likely to be short lived as buyers will get more timid and sellers more aggressive with Friday's Milk Production report expected to show continued increases in cows and production per cow. STRATEGY COMMENTS For live cattle futures, despite the bounce occurring, a short bias is favored as a mid $70s price seems more appropriate for the summer contracts based on the large cattle supplies and competition from other meats. Maintain the scale-up short strategy held in the June and August contracts, especially in light of the technicals. Short hedges are held via puts. Short hedges have been recommended for the short term and long term based on the recent rally and my bias for near-term weakness to pressure deferred contracts too. For feeder cattle futures, a bearish bias is favored due to my weaker outlook for live cattle, the negative feeding margins, and more of a technical slide. A short spec August strategy is in place, looking for at least a corrective setback to the May 23-24 gap, which would be a 38% retracement of the rally. Short hedges are to be maintained as there seems to be a reasonable chance for futures to fall back to the lows. USDA is forecasting prices to average in the 95-101 range for the last half of 2006. For lean hog futures, my bias is bearish due to the large meat supplies, but has been wrong due to strong hog and pork demand. A short spec futures position was stopped out via the early rally triggering the close protection. Another attempt was hinted at amid the Japanese beef export story that could hurt pork exports, and could be tried considering the exhaustion gap, the overbought condition, and the much more attractive price at the higher levels. If sell, protective stops above the recent highs seems prudent, leaving enough room for a higher level and potential reversal. Maintain the bearish option strategy. Hog producers should maintain short hedges as there is considerable downside risk when one looks at what the larger domestic meat supplies did to hog prices in 2002. Considering the recent rally and today's technicals, adding further protection if not fully hedged seems prudent. Lift as the hogs are sold. No changes for milk futures. Continue to hold the June and July 12.00 calls in case there is stronger demand and/or a production glitch. **************************************************************************** **************************************************************************** WEEKLY VANTAGE POINT **************************************************************************** TOTAL MEAT PRODUCTION MEAT PRODUCTION (MILLIONS OF POUNDS- EXCLUDES CONDEMNED) WEEK ENDING BEEF CALF/VEAL PORK LAMB TOTALS 10 Jun 06 537.9 2.8 384.1 3.3 928.1 3 Jun 06 462.2 2.6 337.6 2.8 805.2 Change +16.4% +7.7% +13.8% +17.9% +15.3% 11 Jun 05 499.1 2.9 382.4 3.2 887.6 Change +7.8% -3.4% +0.4% +3.1% +4.6% 2006 YTD: 10994.4 64.2 9146.2 83.8 20288.6 2005 YTD: 10376.6 68.2 9014.6 81.5 19540.9 CHANGE +6.0% -5.9% +1.5% +2.8% +3.8 **************************************************************************** HEDGER'S NOTEBOOK (UPDATED 6/9) (PRICES ARE UPDATED FROM USDA USING MIDPOINT OF FORECAST RANGE) 2005 2006 2006 2006 2006 2006 2007 2007 CATTLE: YEAR Q1 Q2 Q3 Q4 YEAR Q1 YEAR CORN PRICE 1.96 2.03 2.22 2.05 2.25 2.14 2.45 2.45 FDR PRICE 110.94 106.80 101.00 98.00 98.00 101.50 104.00 101.00 COST PROD 85.04 85.24 88.04 83.26 79.84 80.10 78.84 81.04 CATTLE PR$ 87.28 89.24 80.00 78.00 83.00 82.50 85.00 84.00 FRI FUTURES *** *** M-78.52 Q-78.85 Z-84.35 *** G-87.57 *** 2005 2006 2006 2006 2006 2006 2007 2007 HOGS: YEAR Q1 Q2 Q3 Q4 YEAR Q1 YEAR CORN PRICE 1.96 2.03 2.22 2.05 2.25 2.14 2.45 2.45 COST PROD 40.07 39.16 39.55 40.06 40.32 39.77 40.90 41.80 HOG PR-CASH 50.05 42.63 45.00 45.00 40.00 43.50 39.00 41.63 HOG PR-LEAN 67.64 57.61 60.81 60.81 54.05 58.78 52.70 56.26 FRI FUTURES *** *** M-72.95 Q-69.47 Z-56.07 *** G-58.15 *** **************************************************************************** THE AUTHORS DO NOT GUARANTEE THE ACCURACY OF THE ABOVE INFORMATION, ALTHOUGH IT IS BELIEVED THAT THE SOURCES ARE RELIABLE AND THE INFORMATION ACCURATE. THE AUTHORS ASSUME NO LIABILITY OR RESPONSIBILITY FOR DIRECT OR INDIRECT, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES OR FOR ANY OTHER DAMAGES RELATING OR ARISING OUT OF ANY ACTION TAKEN AS A RESULT OF ANY INFORMATION OR ADVICE CONTAINED IN THIS COMMENTARY. THE AUTHORS DISCLAIM ANY EXPRESS OR IMPLIED LIABILITY OR RESPONSIBILITY FOR ANY ACTION TAKEN, WHICH IS SOLELY AT THE LIABILITY AND RESPONSIBILTY OF THE USER.