Hogs: The trade is preparing for the last seasonal big push in hog slaughter. Though this week’s kill will be limited, highlighted by a low 110,000 to 115,000 head Saturday kill, expectations for a big one next week are widespread. This means there is a three-week window here as we head into the peak weekly kill of the year (mid-November).
The lean hog index, covering cash hogs through Tuesday, is at $91. We would imagine our $86 downside target is about the worst we could expect the December contract to hit. Keep in mind the trade expects December slaughter levels to be slightly muted due to PED impacts.
In other news, Allendale was recent at an analyst conference. The general consensus, like our viewpoint, is that slaughter will not jump up to 1% over last year as USDA’s HP report suggested. If it did then we can talk $82 – $84. Stay moderately bearish for the next two to three weeks. After that, turn neutral.
Cattle: Cash cattle traded actively at $132 early on Wednesday and before ending, there were even $133′s sold. This was a huge jump over last week’s $129 trading. This represents a new record for fed prices. The previous, at $130, was made in the week ending March 2, 2012.
Much of today’s move was based on expectations for wholesale beef. We all knew there would be a resurgence on that end as end users get back into the market after being quiet during the government blackout. Between Monday and Tuesday, there was a $3 increase in wholesale beef. This morning’s beef report showed an increase of 1.35 for choice and 1.84 for select. That was all that was needed.
A secondary issue with today’s purchase was the 21,000 head decline in showlists. While those two factors, wholesale beef picking up and fewer ready supplies, would warrant an increase in cattle price, the issue is not that simple. Packers came into this week losing $50 per head. A $3 or $4 gain in live-based cash cattle equals a $37.50 or $50 per head increase in cost. A $4.64 increase in wholesale beef, off a 799 lb. steer carcass, puts only $37 back in their pockets. In other words, their spending spree has so far put them in a worse position.
We think the sharp rejection of the morning highs Wednesday in futures tells us the trade feels this was a blowoff top for cash cattle. Allendale is not calling this the top for cash cattle. That won’t happen until February/March. However, it is not outlandish to think a small setback into next week for cattle could be seen. We will take profit on the synthetic long trading position (purchased call/short put) and look to restart our big bullish position at lower prices.