The last week of January is usually very quiet in hog futures. Five-year averages show February hog futures up 55 points; pork product down 78 cents; lean-hog-index up 112 points with end of week February having a premium “basis” of 287.

This year, we appear to be ending the third week in January with February futures a small 55 premium to the index (traders worry 2012 pork exports are going to be less than adequate). Should we get the five-year average increase in “basis” premium next week, we will find February futures at a more than 200-point discount from present 8550 levels.

BEEF PRICES HELP PORK

Since traders are expecting next week to find pork loin, butt and belly wholesale increases (45% of carcass), a discount “basis” is not warranted. Selling pressure should be held to a minimum.

On Monday, U.S.D.A. data showed November pork exports at a record 505 million pounds. Tomorrow, Jan. 20, 2012, we have a monthly cold storage report.

Should this report show less-than-expected pork storage stocks, we will have present negative psychology shifting back to the positive side as exports and domestic usage argue against light pork disappearance. In short, we will lose little time in putting premium back in February futures to a more normal 200-300 over the lean-index.

We have just had a four-day rally of more than 300 points in February futures. Traders continue to expect continued domestic pork product strength for the next several weeks as retailers feature pork in January at the expense of higher-priced beef.

Many times, we find traders taking short-term profits going into a major report. It would not be unusual for hog futures to retreat 38% to 50% from this four-day rally going into this Friday afternoon report. Assuming no negative surprise for Dec. 1 pork storage stocks, we should be looking to buy February futures should they correct to the 8400-8550 area.

At the present time, there are only two ways to trade hog futures. We can only have no position or we must be long. The short side is limited unless monthly storage stocks are burdensome.  

CATTLE

From a history standpoint, we find five-year averages showing cattle futures closing the last week of January 70 points lower, cash cattle unchanged for the week, boxed beef losing a large $3.19 for the week with operating margins at a average premium of $26.66 per head.

This year, we find negative operating margins over $90 per head with the expectations that next week we will find packer margins approaching the record negative $112 per head made in mid-December.

Needless to say, most traders anticipate a reduction in daily harvest levels by packers as they try to prop up sharply declining wholesale prices. This, in turn, should find cash cattle holding at best steady (same as five-year average) or possibly losing $1-$2 dollars by week’s end.

Many times, we find psychology trumping negative January fundamentals in cattle. Traders have come to believe that buying bad news in January will make you a lot of money into late March or early April as cash cattle has a strong seasonal increase in pricing into the  early second quarter time period. A normal 12% to 15% increase in cash cattle from early August lows would put cash in the $128.00-$131.00 area by mid-April. With present February and April cattle futures in the $124.00-$128.00 area, we are finding willing buyers on breaks.

NEXT WEEK

Next week, cattle direction will be determined with the Jan. 20 monthly cattle-on-feed and monthly cold storage reports. Present analyst estimates have December feedlot placement down more than 5% from December of last year and feedlot sales down 3%. Should Friday numbers come out at these levels, we would see early week weakness in February against April/June. Should both Friday reports show light beef storage stocks and reduced placements, we will probably have cattle futures 100-200 points higher for the last week of the month. Futures don’t belong this high with the present problems in moving box beef, but buy negative news in January psychology is putting the market higher.

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