Supply factors driving hogs, while cattle prices point lower

Livestock Report

Hogs: One thing you’ll notice in our meat research is that our price projections, for higher hogs and lower cattle, are based strictly on our supply expectations. There is a ton of conflicting economic data that is clouding our demand models (objective). With that in mind our price expectations for the summer are based on no improvement in demand.

On the hog side, there are two supply based positive factors. We all know that supplies drop between now and July. We also suspect that supplies, compared against last year, will also come up smaller than expectations. The Hogs and Pigs report indicated that May and June slaughter levels should run 2.3% over last year. This is where we have a $93-$94 target for summer futures.

This is our overall argument for summer pricing. When we look at cash hog and pork prices, the past few days are confirming this rally is still on track…Rich Nelson
Cattle: At the end of the month, New York City will see temperatures one degree above normal. Here in the Midwest, temperatures will be six degrees above normal at that time. Generally, this is good news for the meat industry. Certainly for beef, which sees a normal increase in production from spring to fall, this period of “extra” beef demand is sorely needed.

The big question here about the actual impact on demand this may give. The first quarter of this year saw beef demand restrained. There is a divergence in the industry about potential second-quarter prospects. Bulls can argue, “…we are coming out of recession. Demand will slowly improve.” An additional argument you will hear is, “…look at the stock market. It just made new highs earlier this month.”

These are true points. However, bears have some very valid concerns. There are a plethora of concerning points that come up with a cursory look at underlying statistics. We are in the later camp.

Additionally, Friday’s Cattle on Feed report brings up something important to note. The days of “tight” supplies of market-ready cattle are only good for this month and next. This market does not have to fall -- yet. Our bearish viewpoint is for prices this summer.

For cash cattle, bids Wednesday morning were at $124. April futures are pricing in $127 trading. That would be steady to $1 higher than last week’s final pricing. It sounds good, but we just cannot see any reason to expect these prices will last from now through summer. The idea that June and August futures only need a 3% to 4% discount here is a little optimistic…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.

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