Hogs: Before we get into hog fundamentals, let’s point out one important fact. Livestock futures have about zero correlation with the Fed actions today. As you may have heard, the Fed decided to keep its current $85 billion per month injections into the bond market. The purpose of this is to keep interest rates low. More liquidity, of course, lowers the value of the dollar.
While some commodities such as energies and metals are tied to the U.S. dollar, livestock is not. Since Aug. 1, October lean hog futures have a 0.00 correlation with the dollar index. A reading of 1.00 means a perfect positive correlation while a reading of -1.00 means a perfect negative correlation. Theoretically, a falling US dollar would be supportive to commodities. This statistic of 0.00 cannot show any clearer that there is no reason for hog futures traders to watch the U.S. dollar. As a side item, since Aug. 1, the December contract has had a 0.01 correlation. When Allendale does correlation studies we only rely on results that are strong (0.65 to 1.00 or -0.65 to -1.00).
Back to fundamentals, we are still seeing tight hog numbers right now. Hog dealers are also indicating weights are falling. Having said this bullish news, we must note the afternoon IA/MN hog report showed a 2.16 decline in Wednesday’s update. For some background, this location has shown daily gains in 11 of the past 12 days. This does not mean we sell futures Thursday. It is something that did not match up with the morning hog bids.
For the “right now” time frame, cash hogs are in a clear uptrend and hog futures are as well. We do think that will be changing in the second half of this month but will not put money where our mouth is until we have backing evidence.
Cattle: Live cattle futures made a strong rebound from the day’s early trading. Wholesale beef prices on both the mid-morning and afternoon updates posted higher quotes. That will have some wondering if this rebound we have discussed is ready to show.
Although we will have adequate numbers of steers and heifers offered out of feedlots through October, we should be seeing carcass weights begin a slow decline (vs. last year levels). That would be due to the loss of Zilmax, which 20% to 30% of feedlots were using.
Also, newswires released the results of their analyst survey for Friday’s Cattle on Feed report. Allendale sees an 8.9% drop in August placements. The average trade guess is for an 8.3% decline. These numbers will be slaughtered from January through the end of April. Essentially, the trade now cannot avert its eyes to this incredible supply deficit that will start in December.
Also, you may have some asking about the drop in the U.S. dollar. Did that support cattle futures? Our correlation study, from Aug. 1 to current, shows December cattle have almost no correlation with the U.S. dollar (-0.19). Sometimes cattle do have a positive correlation with the stock market. It was interesting to see our study show an actual negative correlation to the Dow Jones Industrial Average (yes, a flawed measure of the stock market) at -0.69.
Cattle could theoretically have their own relationship to the Fed news, though. If the Fed is trying its hardest to throw money at liquidity and supporting the economy, perhaps an extra steak will be eaten. Overall, let’s keep this simple and focus on beef fundamentals for now. On that side, this market should turn neutral in the coming weeks then turn raging bullish after October.