Hogs approach rally season, while cattle demand is weak

Seasonal forces at play in meats

Hogs: April is the transition month where pork supplies make their annual dive bomb into summer. We are ready to fall right off the cliff, starting with this week’s kill. At the same time, packers are concerned about sharply lower hog slaughter up ahead, they are taking a plethora of orders for the exciting grilling demand season. This is why right now is typically the time which transitions from lazy pricing into the rocket ship rally into summer.

The recent four weeks have seen pork production 1% higher than last year. Cash pork prices, though, are 17% lower than last year. A 1% increase in production does not make a 17% lower price unless demand is suffering mightily. The severity of this demand problem is incredible.

Our previous forecast was for April futures to break down to $87 then a rally to $100 for the summer contracts. Though April did fall, it fell more than expected. Additionally, summer futures are implying only $92. Seasonally, we should be buying this market right now with both hands at these very cheap prices. Instead we will hold from doing so until the market is ready for it. As a separate note, we are now revising our supply, demand, and price outlooks and will post the results as soon as available.…Rich Nelson

Cattle: From the late February peak in cash cattle, of $130, a normal decline into summer would imply $114. Wednesday's $144.40 low on the June contract already was pricing that entire move in. The livestock analyst community, Allendale included, does a fantastic job at pricing in changes in supply. As an industry, guessing those rare big changes in demand is the hard part.

Most of the meat companies, along with Allendale, thought consumers would recover ground beef purchases one the media stopped playing the scare message. Instead, the industry is seeing lasting consumer resistance against it. Keep in mind, through Memorial Day consumers generally work on the lower end of the barbeque offerings (hamburgers and hot dogs). This should be a time where ground beef keeps overall beef prices from falling too much under the weight of big summer supplies

Without support from this market overall beef prices are suffering. Choice wholesale beef started the year 18% over last year. Now, choice beef is 6% under last year. Like pork, a significant change in demand must be recognized. The hardest question to answer is, “When will this end?” For now, do not consider lifting hedges…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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