Government shutdown, supply are key factors in cattle and hogs

Livestock Report

Hogs: Cash hog bids ran steady Wednesday in most areas. There was some lower quotes reported here and there. Though we don’t have USDA cash hog reports to monitor, we should get an idea of general trends without a real problem.

Aside from the USDA shutdown, the biggest issue to discuss right now is the feasibility of this increase in slaughter implied by Friday’s Hogs & Pigs report. Last week’s kill was 6% under last year’s big marketing numbers. By the end of the month, we should be seeing slaughters equal or higher than last year. That is a 179,000 head increase in weekly kill over last week’s numbers. In other words, if USDA is right we should hear of big numbers hitting the packing plant and sharply lower cash hog prices.

While we do think there will be a PED impact, our best guess right now is that it will be only moderate. December hog futures right now have about a 2% drop in slaughter, year or year, priced in. Right now we are thinking it will be about even with last year and that prices will run $84 or lower.

Our short-term viewpoint is neutral still. We would like to see some type of supply increase, as implied by the USDA report, before we trade from the bear side. Also, there is that juicy gap at just over 87.00 to consider. Typically the market does not like to leave these open.

Cattle: Previous government shutdowns that lasted days had almost no price impact. The big one in 1995, which lasted 21 days, accompanied a sharp 3.3% drop in price. Off this year’s December, that could equal 127.65. We are growing a little more concerned that this year’s shutdown may last into the mid-October debt-ceiling deadline. For our large bullish trading position, this is a concern.

We are exiting one long futures at the market and have moved up the profit protecting risk on the second position. As we have said before, our long cattle campaign should only be attempted with correct risk management. Our bullish bias was based on severe price declines and no change in demand. Now the situation is severe price declines but questions for demand.

About the Author
Rich Nelson

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com.

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