Hogs could turn on high gasoline prices, while demand drives cattle

Both markets entering key demand-driven period

Hogs: Gas prices are rising, and that could ultimately impact hog prices. Some energy analysts suggest prices will retest the 2008 price highs at some point this summer. We all know gas prices are a significant issue affecting demand right now. But will that last into summer? Will potentially higher gas prices affect pork demand even more by the summer?

Judging by the two previous years of high gas prices, it really was not an issue going into the summer. In 2008, hog prices rose 44% from the start of the year. Last year it was a 26% increase. By comparison, the trade’s current 13% premium for this year seems pretty paltry. For short-term pricing, while cash pork prices have shown some stability we must point out cash hog prices have not bottomed yet.

LEAN HOG INDEX

 

First of the Year

On June Expiration
2008 51.07 73.47
2011 72.47 91.62
2012 81.50 92.17 (current futures)

Wednesday’s slightly lower cash hog trade could make it eight days in a row of losses. Seasonally, this market can bottom anytime between now and mid-April, so we are in that waiting period. With this market returning to new lows, on the April contract, our profit-protecting order on the short straddle position was filled. We are long the May contract as well as short a put for speculative trading…Rich Nelson

Cattle: It is not uncommon for markets to post good rebounds after bearish demand issues are resolved. As it stands now, the ground beef supply has declined by 10%-15% while total beef supply has declined 2%-3% with the ending of most LFTB production.

That lower beef production should have a good effect on prices. Tyson’s COO agreed with us by suggesting demand “would recover quickly.” Instead, wholesale beef prices fell Tuesday and another $1 on Wednesday. A few thousand head of cash cattle traded $1 lower in parts of Nebraska and Colorado. Wednesday afternoon the U.S. secretary of agriculture and the Iowa government met in Des Moines to try to put some facts on the LFTB issue. On Thursday, a collection of state governors will tour the Sioux City, Iowa Beef Products Inc. plant. CNN is said to be carrying a newsfeed on the tour. Let’s see if this counter-campaign is carried by any of the big three networks.

Overall, we still think this market could post a moderate rebound in the next two weeks. It will not stop the overall move to lower prices in the summer…Rich Nelson

About the Author
Rich Nelson

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com.

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