Hogs: The August hog contract expired Wednesday at noon. Though the October contract has been the dominant contract based on volume for some time, it is now the one used for pricing the cash markets.
It is normal at this time to turn to the October and wonder if that big discount is warranted. With the lean hog index at $102.49 through Tuesday’s cash hog trading, and October at $86.52 (Tuesday’s close) your natural inclination is say that discount is too much. How can cash hogs post a $16 decline (15.5%) over just two months? It sounds way too much, right?
Though we have filled this commentary each day for the past month with this discussion of a “minor” mid-July to early August bounce then a big drop coming, so far that big drop has not happened. We are not in that panic time yet where “any amount of hogs are too many.” Keep in mind the month of October is just a point between the price highs in summer and the price lows in winter. Get this: In the past few years, the drop in cash hogs (lean hog index) has ranged from 9% lower to 26% lower. That puts the October somewhere in the range from $76 to $93. There was a rally from Aug. 14 to Oct. 14 in 2009 (due to the ending of swine flu based export bans). Also in 2005 the drop was only 2%. However in all other normal years, buckle your seat belt and hang on.
Keep in mind that this week is a pivotal one. Hog slaughter is now beginning its big seasonal increase. After this week, we can discuss the lower demand period (post-Labor Day procurement). For right now, the general trade has not seen cash hogs break hard yet. We will happily allow this market to run all it wants for now. Into early next week we will likely take aggressive short positions for speculative trading
Cattle: The beef cow herd has been in slow liquidation for a few years. The conditions are just now ripe for the start of expansion. Moisture has returned to the Plains and the sharp drop in grain prices has reignited the calf and feeder market. Our only question is whether expansion will actually start. Even if it does, that means even tighter supplies in year one and two as those held-back females don’t make their way into the meat counter.
This is important in the “right now” time frame as well. We are now coming off the seasonal lows for the year and are starting the normal rally into winter. So we have a pretty bullish long-term setup at the same time as short-term pricing is also bullish.
These are the trades that we live for in the livestock complex. Who really cares about guessing next week’s cash cattle when this situation is right in front of us? Though we don’t think this market will make a big run from now through October, we remain very supportive from December on out.