Hogs: Over the previous 16 years, we have never had such a late bottom in the cash hog market as this one. Twelve of those 14 posted “the low” in January, two in March, and two in April. Due to high gas costs, Lean Finely Textured Beef backlash, and a surge in slaughter in late April/early May, this year’s low in the lean hog index did not occur until May 11.
The average rally from the early year low, usually occurring in January, to the June 14 expiration of June futures, is a large 37%. That won’t happen this year. In the two years of a “late” cash hog bottom -- 2002’s April 19 and 2006’s April 14 -- they rallied 19% and 40% from those lows to June 14. This year’s June futures are only implying a 9% rally from the May 11 low. This seems pretty darn small.
For now we must say a very conservative target on summer futures is $90. In case you are wondering about the low 2005 and 2009 years…2005 had a minimal rally as the world’s bird flu epidemic was picking up throughout the year. The drop in world chicken demand caused a backlog of product left in the United States competing against pork. And 2009 had a minimal rally due to the drop in U.S. pork exports from the swine flu finding. This year’s issues should not be on that magnitude…Rich Nelson
Cattle: This premium we have in prices, compared with last year, will be something to monitor. Many in the industry are suggesting the cash cattle bottom for the summer has already been made and that summer futures don’t need this discount to cash.
If you look at the same period last year, the recent rebound could indicate an early summer low has been made. For the short term, we are not quite sure if this is the case. For bigger picture pricing, we remain bullish with some pretty conservative targets of $130 for both October and December futures. If Friday’s Cattle on Feed report shows 12% smaller than last year placements, as is the average guess, we may have to discuss revising that price expectation higher…Rich Nelson