Hogs: As the seasonal build up in hog slaughter picks up, cash hog and cash pork prices are breaking. Along with this decline in the current cash markets, the trade therefore lowers its estimate of where future prices will be.
It is not uncommon to see deferred hog futures break harder than they need to on this seasonal slide, then post a rebound a few weeks before their expiration. That is what we suspect is happening now. In fact, the seasonal trends we noted last week show this clearly. October hogs typically fall hard into Sept. 1. After that, due to National Pork Month buying and other factors, October futures actually rally.
We still hold our view that playing this market from a sideways point of view from our 86.60 and 82.74 expiration estimates is the best thing to do right now. That means we may even consider buying these deferred contracts if their "discount to our forecast price" gets juicy enough. We may even take the step of advising producers to exit their 2013 hedges if this market gets out of hand on the downside.
On the December, we may make that considering if some quotes around or below 79.00 are seen. From a long-term standpoint, we will point out that sow slaughter has dropped hard in the two latest weeks of information (-10% and -8% vs. last year respectively). This should not be that much of a surprise, though, as last year at this time the pork industry was in the midst of a minor liquidation due to the grain price rally. Even without that comparison to 2012, we strongly suspect U.S. producers are in a slight expansion right now. We should see the mid-2014 and beyond show the brunt of these numbers.
Cattle: Our estimates for Friday’s Cattle on Feed report are different than most analysts. Only two of the 11 analysts have an increase in placements plugged in.
The argument for lower placements is clear. Cattle feeders have been losing money for over two years straight now. In addition, they can argue that those sky-high feeder prices paid in the past six weeks were made because backgrounders now have moisture on those pastures.
Our argument for a higher placement number is not without its own facts. Cash corn in the Plains fell 40 cents from June to July. Everyone in cattle country saw USDA’s production estimates, and steep decline in fall/winter futures, and expects even more. Also keep in mind the July 2012 placement number was a 10% reduction from the previous year. On top of that, this year’s July had one more weekday to bring loaded trucks into the feedlot than July of last year.
Let’s make one thing clear. Even if Friday’s placement number hits our seemingly high estimate, we are not bearish. In the two previous months we have a big drop in lightweight calf/stocker placements. There will still be a good shortfall in Q1 cattle slaughter to speak of.