Buy Cattle and Hog Futures as Feed Prices Increase

By Ken Hughes   ISSUE 703 | MAR 2008

Grain prices have been soaring, with new records hit in corn, wheat and soybeans this year. It has become increasingly expensive to feed hogs and cattle and as a result, farmers have been reducing the size of their herds. This is reflective in spot-month lean hogs (April contract), which are currently trading near 57.75 cents per pound, just off the recent lows. August lean hogs are trading at 76.30. Last week’s slaughter numbers totaled 2.306 million, up 9.8 percent from last year. In addition to the slaughter numbers, frozen pork in cold storage at the end of February totaled 603.244 million pounds--the highest total for a single month going back over 30 years.

I currently recommend buying August 7600 lean hog calls at 590, and selling August 8200 calls at 280. That represents a total cost of $1,240, not including commissions ($590-$280 = $310x4 =$1,240). One point in lean hogs = $.01 per hundred pounds = $4.

Live cattle is another commodity that is adversely affected by high grain prices. April live cattle are currently trading at 91.15 cents per pound, and October live cattle are trading at $1.0045, so the market is looking for tighter supplies going into the end of the year. Slaughter numbers were up 1.9 percent from last year, not that much in my opinion. However, last month indicated that fewer cattle were placed in feedlots. It also showed that feedlots sold more cattle than anticipated. In addition, cattle weights are also seen dropping as high grain prices will reduce the length of time to feed. We are already seeing frozen beef supplies in cold storage starting to shrink. February numbers totaled 418.254 million pounds, down from 445.131 million in January and 458.900 last year. The cattle on feed report is due out on Thursday, March 27 so watch those numbers.

Demand is also expected to pick up going into summer. Of course, we have the usual grilling season here in the U.S. Japan partially lifted its ban on beef exports last year, and another big consumer is China, where per-capita meat consumption has increased 150 percent since 1980. High grain prices, a reduction in the size of herds and steady demand should send cattle and hog prices significantly higher going into the end of this year and next year.

I recommend buying August live cattle 9800 calls at 230. Your cost would be $230x4=$920, not including commissions. Buy the August futures at 9470 and buy the August 9400 put at 322. Your cost is estimated at $1,568, not including commissions. ($322+$70=$392x4=$1,568). One point in live cattle = $.01 per hundred pounds = $4.

Please feel free to call me if you’d like further information about this strategy, or with any other market-related questions you might have.

Ken Hughes is a Senior Market Strategist with Lind Plus. He can be reached at 866-284-7124 or via email at khughes@lind-waldock.com.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

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