Hogs should rise, slowly, while cattle slaughter increases

USDA reports on production

Cattle herd Cattle herd

Hogs: USDA made only a small change to pork production. We really cannot argue with their numbers too much right now. A 1.3% fall in 2013 pork production is not unreasonable. Keep in mind hog slaughter won’t take a good fall until early summer of next year (affected by the summer 2012 sow slaughter).

One area that we feel USDA will continue to lower is their chicken production estimate. While we fully recognize the chicken industry is normally very slow in reacting to negative margin situations, we would think that by the first of the year they are running 1% to 2% lower than last year. USDA’s estimate for a full year 2013, showing 1.1% lower, may be a bit too conservative.

The net message which we must note here is that total US meat production will continue its decline in 2013. Though we are not big bulls for US consumer demand, we certainly feel steady to slightly higher demand should be expected.

As to the very short term, we still suggest this hog market is in the process of turning around right now. Certainly as packers really get into bidding for later September hog supplies we feel they will find a slight deficit waiting for them. We have added to our net long position today. Hedgers should continue to hold all those positions through this rebound…Rich Nelson
Cattle: Today’s report was a little disappointing for cattle. USDA increased its estimate of 2012 production due to higher cow slaughter and fed cattle slaughter. We can agree with the cow slaughter issue. They also raised the 2013 forecast due to expectations of stronger placements in the coming months. It is a good argument as most of cow/calf country has seen continued net drying in pastures in the past 30 days. All but Kansas and Missouri have seen rainfall limited to 10%-50% of normal.

The opposite viewpoint is simply that feedlots don’t want those numbers. Severe cattle feeding losses were seen this summer. In the big picture, let’s be clear: Beef production is still set to decline in 2013 (and likely 2014). The 2013 decline is pretty step at 4.3% lower than 2012. As prices are determined by supply of meat produced and demand for that meat, and not on feedlot profitability or corn prices, we suggest this rally will continue. Our minimum upside target for April 2013 futures is $138. There is a good chance $142 could be seen…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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