Hogs: Tuesday afternoon’s cash pork trade, closing at $109.88, garnered some discussion Wednesday morning. That was the highest close for cash pork since Aug. 8, 2011. While it was good news for bulls, the trade is pricing in the idea the cash hog market has either peaked or is close to peaking for the year.
Our stance is that the cash hog peak is behind us. Though hog slaughter will continue to fall until the third week of July, the issue now is pork demand. It does not matter how much further production will decline if the market can’t move it (grilling demand backs off into July and August). Bids Wednesday morning were steady to $1 lower in most locations. Some could question why cash hogs are not keeping up with cash pork. Keep in mind for several weeks packers were struggling with losses. Keep in mind their summer pork processing losses are both an issue of the hog/pork spread as well as higher fixed costs applied per animal due to fewer hogs showing up at the door. Cash pork is simply getting back in line right now. The question is no longer about how high prices can go but now how quickly they will fall as we begin the process of falling down to winter lows.
In other news later Tuesday afternoon, Mexico suspended imports of live U.S. hogs. They are concerned about the findings of PED in the U.S. herd. This is not a consumer safety issue as PED does not harm humans eating the pork. They are simply trying to protect their own production levels. This will have no effect on U.S. prices. Let’s put this into perspective. In 2012 we shipped 26,793 hogs to Mexico (only 134 trucks) and another 4,505 to Canada. Imports of hogs into the U.S. totaled 5.652 million from Canada, 0 from Mexico, and and 30 head between the U.K. and Italy. Those numbers are all listed correctly. If Mexico banned our pork, which they have not, this would be an issue. As it stands, this has no market effect.
Also on the bearish side, so far we have absolutely no indication of “huge” pork sales being made to China. Despite the hype in recent week from rumors, muscle cut export sales to China since the new weekly series began are only 3.8% of our total pork sales. As organ meat is about half our sales, we will point out this data is not complete. However, for what we have facts on, the China pork buying rumors are a bust.
Up ahead we have the Hogs and Pigs report on Friday afternoon. The hog herd is seen 0.5% higher than last year. Farrowing intentions for Mar/May are -0.8% from last year, Jun/Aug unchanged from last year, and Sep/Nov +0.6% from last year. This report should not be a surprise to anyone. We have a few more hogs than last year and will continue light expansion into next year. We feel the lower grain prices we expect over the next six months will encourage a little more expansion than these numbers would suggest but nothing too concerning…Rich Nelson
Cattle: While hog prices are now turning the corner and looking Southward for direction for the next five months or so, the cattle market is doing the opposite. Generally, cash cattle posts a bottom between June and August (10 year average is late July). The trade knows there are just a few weeks left for us to fish around for the year’s low in prices.
Futures, however, are fully focused on pricing in the normal rally which occurs from summer to fall/winter. Though this market has gained a little more than we expected by now, we are fully behind the bull stance. While our trading position, long October futures, is still valid, our real interest is actually the December and 2014 contracts. It seems we have continued to readjust our expectations of when the big year of “beef supply deficit” for some time. At best guess, 2014 will be the real deal. So we now get to guess how high prices will go next year, and we have a tremendous buying opportunity as we are at the summer lows from the year before.
In other news, we were pretty darn impressed with Wednesday’s futures pricing. This comes especially when you consider Q1 GDP was revised down from a 2.4% increase over last year to now only a 1.8% increase. You can’t blame the trade for ignoring this, though. Financial economists feel the poor Q1 was an old issue and that the economy, and consumer demand, is a separate issue now (bullish for beef).
Let’s restate USDA’s estimate of the coming Q4 beef production again…a 6% drop vs. last year. Last year cash cattle hit $127 in October. Futures are pricing in the same price as last year. Do you see something mispriced here? We sure do. Buy December fats for the long haul…Rich Nelson