Hogs: With all of the hoopla regarding Wednesday's supply/demand report’s implications on grains, we must remind ourselves that the last few pages of it also cover meat supply/demand.
For pork, the USDA made few changes. We were interested in seeing whether USDA would adjust its 2013 pork production estimate lower (due to smaller than expected slaughters) or whether exports would be raised (due to the Smithfield deal). Only a minor revision of 55 million lbs. was made to the May estimate. That is not much, but keep in mind USDA will likely wait until the end of the month Hogs and Pigs survey release. Whether it is now or next month, production will likely be lowered a little more. As it stands right now USDA is assuming pork production will run 0.7% higher than last year. No changes were made to exports. The amount of pork the US consumer will be left to eat this year is actually seen 2.4% higher than last year. For next year, USDA expects production to increase by 2.6%.
We cannot argue too much with these production figures. Lower feed costs in the coming months will sharply boost profitability. That is one production signal that cannot be avoided.
For pork’s main competitor, chicken, USDA added a small 25 million lbs. to production. That was more than offset by a 100 million lb. increase in exports. As it stands now, chicken production is seen 2.0% higher in 2013 then a big 2.9% increase for 2014.
Between pork and chicken, you can expect lower prices next year. For short-term pricing this market is still caught up in the short supplies/China buying rumors issues. Packers are finally stepping in to slow things down though. On Friday, two separate pork plants will be quiet (includes the nation’s largest one). Perhaps by Friday we will see this cool down the rally in cash hog prices.
For general trading we are keeping it simple. This market has not topped yet, and the China pork buying rumor is still the issue that no one can prove or disprove for now. Speculators should be on the sidelines. Our next trade will likely be the October cattle/October hog spread. Producers, hold your hedges…Rich Nelson
Cattle: The changes made to the beef balance sheet Wednesday were not good. USDA added 330 million lbs. to its 2013 beef production forecast. They pointed out that placements in the first half of the year were larger than expected and that cow slaughter remains high.
Do you remember that back in October and November USDA was suggesting beef production would fall by something like 4% to 6% in 2013. Well, their number now is only for a 1.8% smaller than last year. On top of the production revision, they also lowered beef exports. This means that the amount of beef left on the U.S. consumer’s plate was revised higher by 430 million lbs.
Putting it all together, the amount of beef left for the U.S. consumer, after exports, will only be 0.5% smaller than 2012. They have passed the buck on 2013 being the big beef deficit year. Now it will be 2014 where they suggest a 5.2% decline in production.
For general trade direction we remain clear bears with our $115 August target. On a seasonal basis, cash cattle typically posts a mini-bottom in later June, bounces for a couple weeks, and then returns to retest or break that June low in either July or August. It is not time to buy yet. It may be coming time to readjust our bearish expectations to more moderately bearish expectations soon…Rich Nelson