25, 2008 -- "You cannot lift a bull by the tail." In the futures industry, that hoary old saw simply means if a market is going to stage a bull move it has to be led by nearby prices and not distant prices. A rise in a market with nearby prices leading the way upward indicates demand is rising, supplies tightening and the market psychology bullish for here and now. In a classic, legitimate bull market, nearby prices lead the way upward, not the tail end. Whenever the tail end of a market is leading the way upward, prices for the front end are fragile and vulnerable to weakness as it shows demand is less than robust and supplies more than ample to meet immediate needs.
The two best examples of bull markets that are currently being lifted, "by the tail" are live cattle futures and lean hog futures. Both are in the midst of bull runs that are being led by distant futures. Nearby April cattle for instance, closed today at $92.27 while April '09 futures ended the week at $105.85. And nearby June hog futures closed this week at $76.35 while June '09 lean hog futures posted a high today of $90. The bullish enthusiasm and highest prices are for the distant month livestock rather than for the nearby positions.
As recently as three weeks ago, the weakest of any and all commodity markets was nearby cattle and hog futures. The front end of the cattle market was at contract lows down near $86 while nearby hogs were also at contract lows, down to $66. Cattle prices have since rallied $7 and hog prices have jumped a whopping $10. The rally has been huge and most analysts are forecasting further gains into mid year.
Nearby livestock futures that there were shunned for months with no bull following whatsoever, have suddenly become the darling of the marketplace. Critters are now the, "the bull markets du jour," joining the ranks of other commodity markets that are also classified as bulls.
Still, "you cannot lift a bull by the tail." The three week bull run now underway for nearby livestock prices is suspect if there is even a minor shift in fundamentals back to the bear side of the equation. If demand for beef or pork were to suddenly slow, prices will set back quickly and deeply. My sources indicate that the recent run up in retail meat prices is causing sticker shock with consumers. And when consumers flinch at the meat counter, rest assured demand will fade and fade quickly.
The most difficult fundamental to gauge or to rely upon for any market is demand. You never know when demand will surface. Or, disappear. In the case of cattle and hogs, there is no doubt in my mind that the recent run up in values for nearby futures was sparked entirely by a sudden rise in demand. There is also no doubt in my mind that if there if so much as a hiccup in demand, nearby futures will be in deep trouble.
Of the two markets, the one most vulnerable to a significant washout, a crash and burn scenario if you will, is the oinkers. The lean hog market tumbled badly a month ago when the USDA announced in a quarterly Pig Crop (Snout Count!) report that the total inventory of US hogs was 6.5 percent above a year ago. But after falling to $66 the market began to rally along with the sudden surge with pork demand. Over the past three weeks, pork cutout values have jumped a staggering 28 percent which in turn allowed nearby hog prices to rally $10. Needless to say, most have totally forgotten about the very bearish Snout Count. But I didn't!
Understand. There is no shortage of hogs. Daily slaughter is running 13 to 14 percent above a year ago levels, an all time record. The force supporting prices as I keep saying is demand, the most elusive of all fundamentals to anticipate. As demand slows in the coming weeks, amid record daily kills, nearby lean hog futures will more than likely give back most if not all of the $10 it has recently gained.
But here is the rub with that ice cold bearish forecast. Liquidation of the hog breeding herd in the US and Canada is picking up momentum as producers are hemorrhaging financially. High prices for feed and fuel and stop and go demand for red meat is bringing about steady liquidation in the hog breeding herd. That of course, is bullish for hog prices down the road. Then again, that is also why June, '09 hogs hit $90 today. Hog producers should be hedging spring and summer production now. Traders, searching for a market that is vulnerable to a significant washout should also be sellers. If you doubt such a strategy will be profitable just remember this: "you cannot lift a bull by the tail." Or, a hog.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)