Hogs: Hogs took the center stage of agriculture markets Wednesday with a surprisingly sharp decline. June futures reached a full 2.75 lower, just a tad off limit down. In recent days we noted a build up in slaughter-ready hog numbers has been seen.
Before we get into the numbers we must first look at the big picture. The Dec. 1 Hogs & Pigs report indicated market hogs over 180 lbs. totaled 0.3% higher than last year. These are the hogs that will be slaughtered from Dec. 1 through the third week of January.
Here’s the breakdown in weekly slaughters vs. last year. Dec. 8 +34,000 head, Dec. 15 -52,000, Dec. 22 +201,000, Dec. 29 -206,000, Jan. 5 -89,000. These numbers have not been adjusted by calendar days or any other measurements. If you add up those numbers you have a total kill deficit, compared with last year, of 112,000 head since Dec. 1. The ugly issue here is that this market has to fit a little over 100,000 head in extra numbers into schedules over the next week or two. There is good news with that statement.
Part of Wednesday’s big drop was the fear that USDA was just plain wrong on the Hogs & Pigs report. The mindset was, “If we have more hogs than expected showing up at the packing plant door now, than that must mean all future numbers will also be larger than expected.”
We just showed in this commentary that this problem is a simple short-term marketing problem. The good news is because we just showed this is a short-term problem, that can be dealt with by swallowing extra hogs in the next two to three weeks, we should have this backlog cleared out by the Feb. 14 expiration of the February contract. It is likely this situation may not actually affect Feb. 14 hog prices. The other piece of good news about this issue is this backlog should have absolutely no bearing on the hogs supply on June 14 or July 14. Why the June and July contracts were nailed to the wall as well is the real question.
Let’s make this very clear: This market way overreacted. We cannot say it will bottom Thursday and rally straight up on Friday, though. 1) We have to find a home for these extra hogs and that home will be made at lower prices. 2) The charts look absolutely terrible.
A look at traditional technical analysis shows a well-known topping formation was made and was now confirmed. The head-and-shoulders formation would imply April could get down to 83.30 and June to 94.38. You cannot ignore the ugly trade psychology in this market. For the big picture, let’s be realistic. So far we cannot say this now means we have massively underestimated long-term supplies. The remaining categories of the kept-for-marketing numbers in the December H&P report all showed slaughter will be almost equal with last year through the end of May.
We were never outright bullish hog prices in the “right now” time frame. We had indicated that February and April were correctly priced and that it was not until the summer contracts that futures were undervalued. Our trading position is that of a short call (+1.42 profit currently) and a short put (-1.15 profit currently). Given how massive this over reaction to a short-term backlog, we will be taking a serious look at an outright long position in the coming days…Rich Nelson
Cattle: With lean hog futures pushing near limit down at one point Wednesday, live cattle futures felt some carryover pressure. There is some concern here that we may have a short-term setback in cash cattle in the next week or so. Texas traded a few though Tuesday at $128, steady with last week, but packers were only bidding $125 and $126 today in Kansas. That sent a clear message that they will try to get back some control over this runaway cash cattle market.
We really cannot argue with a short-term lower move for cash. Packers have seen a poor margin situation get even worse in recent weeks. We cannot go up every single week. In addition, we noted in the hog commentary there may be up to 100,000 head of backlogged numbers to work through in the short term (hogs, that is, not cattle).
In the big picture, let’s also keep in mind this tight cattle supply is just going to get worse in the coming weeks. There is no bearish spin you can place on that. Lastly, the current price from the Dec. 19 high on the April cattle contract still appears nothing more than another correction in a bull market. It was noted to two other short-term setbacks this fall that prices fell for 19 and 20 days. Today marks day 21 of this current decline off the highs. In the other two setbacks April futures fell 2.4% and 2.0% respectively. Today’s break now puts the current decline at 2.0% off the highs. Yes, there is concern in this market. Looking at this objectively we cannot say this is anything more than a short-term slump in a bull market. We added a second long position to our outright bullish stance today…Rich Nelson