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CME: Futures in Tandem with Equity Markets

by 5m Editor
21 October 2008, at 12:27pm

US - CME's Daily Livestock Report for 20 October 2008.

In the past two weeks livestock and grain futures have been preoccupied with the upheaval in financial markets and, for the most part, futures have traded in tandem with the equity markets. But as signs of a tenuous stability begin to emerge, factors other than the wild gyrations in the stock market will begin to affect cattle and hog prices.

Monday trading seemed to break away from this recent cycle as nearby cattle and hogs were generally weaker while deferred hogs apparently received some much needed support from the surge in grain prices. The weakness in cattle at a time when equity markets were up almost 5% points to the serious concerns regarding beef demand going forward. The moderately bullish USDA cattle on feed report did little to assuage such concerns, especially given the persistent weakness in the US foodservice sector.

It is important to note that weakness in foodservice impacts beef prices both directly and indirectly. Lower customer counts mean fewer beef servings consumed through the “away from home” outlets. Such servings may or may not be replaced at home where options tend to be more plentiful (pasta, salads, etc). Also, as some beef experts have pointed out in the past, beef remains at a disadvantage to chicken when it comes to home preparation. Which brings us to the secondary negative impacts on beef demand.

The slowdown in foodservice sales has negatively impacted demand for chicken breasts. The broiler industry has standing long term contracts with foodservice companies. As foodservice business has slowed down, end users appear to be chocking on inventory. This has pushed more chicken breasts into the open market (only a small percentage of chicken breasts produced trades in the spot market). Current spot prices for chicken breasts are quoted by USDA at just a little over $1 per pound, although private reports is that product could be had well below that, almost 22% lower than last October and also well below the 5-Yr average.

The decline in chicken breast prices is negative for pork loins also. Export demand for hams and pork trimmings is slowing down and this means that pork loins will have to carry a larger portion of the carcass value. But that will be a very tall order considering the current weakness in the broiler complex.

5m Editor