Hog opportunities buck long-term trend, while cattle feels bullish

Supplies a key factor in livestock

Hogs: We estimate the upcoming Cold Storage Report will show this year’s September posted a record buildup of pork in storage due to the huge increase in marketings in the first three weeks of the month. That is a bigger-picture issue though.

For the short-term, the market is still in recovery mode from that large oversupply period. From the Sept. 19 low, cash pork has gained 16%. From the Sept. 21 low in the Iowa/Minnesota run, cash hogs are up 30%.

A lot of people have been asking about the seasonal move lower from here. Though we have not yet posted a peak in short-term cash hog pricing, the trade looks for prices to post their normal decline in pricing into December. Cash hog prices, the lean hog index, fell in eight of the past 10 years between Oct. 16 and Dec. 14. The average decline in all 10 years was 2.1%. From yesterday’s lean hog index of 83.49, that would put the Dec. 14 price, December futures expiration, at 81.74.

A more realistic measure is the average of just those eight down years (-6.5%). That decline would equate to 78.02. Wednesday’s December futures settlement was 79.17. Keep in mind these are the Dec. 14 prices. Often you will see cash hogs post lower prices before that. They could be on the way back up by Dec. 14.

The short-term trade is clear…we feel prices are overvalued and will happily sell when the market is ready for it. Our working downside target for December futures is 74.00. Stand aside for now…Rich Nelson
Cattle: Falling placements now will impact the first half 2013 beef supply. This keeps us long-term positive on this market.

A secondary issue here is Japan. The trade expects their parliament to approve their Food Safety Committee’s recommendation to make it easier to import U.S. beef. The committee recommended to raise the age of cattle from 20 months and under to a standard of under 30 months.

This greatly expands the pool of beef we can send them (all feedlot cattle would qualify). This decision from their parliament is expected by the end of the year. We don’t expect to see buying to go back to 2003 levels, but an improvement should be seen…Rich Nelson

About the Author

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.