25, 2007-- Thanks to China, the old saying, "all is fair in love and war" was changed this week. The saying now goes, "all is fair in love, war and commodity trading." The old saw was given new spin because weeks ago, China loudly announced they would not buy any more U.S. pork from certain packing plants. The announcement shook up the market so badly prices dropped $12 in less than two weeks, the largest decline in well over a year. China claimed U.S. pork did not meet their high standards for quality. However, once prices were far off the best levels of the year they turned buyer quickly. It was announced this morning that China struck a deal with Smithfield Foods to buy 60 million tons of US pork and immediately, hog futures exploded upward, rising more than $3.50 ($1,400 for a futures contract on $1,000 margin!) in minutes. Obviously, China jawboned the market lower so they could pick up a bargain, proving without question, when trading commodities, all is fair just as it is in love and war.
Will China buy more U.S. pork? More than likely. It is a good thing too, since U.S. exports are the lowest since 1990 while production is record large. But fears of Chinese buying will underpin the pork complex for months as no one wants to be caught napping in case another big deal is signed, sealed and delivered. China is now a wild card in the pork complex just as it has been for years in all other agricultural markets. Though the pork complex enjoyed a stellar week thanks to Chinese buying, it nonetheless paled in comparison to the week the cattle market enjoyed. Cattle prices were firm early, following last weeks On Feed report that was a bullish surprise. Late in the week, cash cattle prices jumped $3 to $4 and more good news surfaced when S. Korea announced they would resume buying U.S. beef. That was more than enough for the market as December futures soared upward, closing at $100.75, the 2nd highest close for the year and one of the loftiest closes in history.
It is easy to bad mouth the pork complex when supplies of market ready hogs are so great as to be burdensome and exports weak. HIstory shows that ample supplies and poor demand are not the things of which a bull market is made. A bear market yes. A bull market no!
In the case of the cattle market, the opposite is being seen. Supplies of market ready animals will drop sharply, starting in the last week of this month. The July, On Feed report predicts a decline of nearly 18 percent by late November for cattle supplies which in turn hints that December futures have a rendezvous with $105. Helping the bull cause are exports of U.S. beef that are up 20 percent from 2006 and if USDA estimates are correct, should be 67 percent above year ago levels by January 1.
The cattle market is poker hot bullish with available supplies due to drop sharply and exports continuing at a record setting pace. Helping to keep the market at a blistering temperature was a jump in boxed beef prices on heavy demand. The week ended with choice box prices a bit over $1.43. If domestic demand continues strong boxed beef can rise and close over the $1.48 to $1.50 level, another surge upward in cash and futures can be expected.
China was a wild card for the pork complex this week but Japan is the wild card for the cattle market. Exports of U.S. beef to Japan are meager due to their fear of beef as a result of the mad cow scare. But there are clear signs Japan will soon resume importing U.S. beef just as the South Koreans did. A resumption of Japanese buying will be just one more bullish force to reckon with.
There should be a set back in cattle prices now that values have rallied sharply the past few sessions and futures are snug up against contract highs. A break should and could unfold at any time. Then again, we may be staring at a historic bull run that is just now getting underway. You never know about such things.
My gut feeling is the market could have far more coming to the upside than anyone, including yours truely, can fathom becomes so much bullish news is surfacing at once. Unless the trade gets caught up in a, "buy the rumor, sell the news" psychology, the current cattle rally may have the legs to hit new, all time historic highs by the time you read this column. But once more, you never know for sure about such things. If I can be of help, call me at 406-682-5010. The new ring tone on my phone says, "mooo." If you are as bullish cattle as I am, you may enjoy the sound. Or, you may not!
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)