Hogs: The hog market raised a few eyebrows Wednesday. After two weeks of straight declines in prices, we saw an attempt to turn higher. The front three contracts posted gains from 92 cents to 1.30. This comes at a surprise to many when kills are running at 2.3 million head. In the big picture, though, this is the right time for a market bottom (right at the worst of supplies).
While we have not heard much from the PED bulls in recent days it is likely that we will hear this talk really pick up in the next two weeks. While we must keep a healthy dose of skepticism on PED’s actual nationwide slaughter impact, we cannot ignore the potential here for the December and beyond period.
Cattle: The average guesses for Friday’s Cattle on Feed report were released by the newswires yesterday morning. The Reuters poll of analysts found an average trade guess for October placements at 8.7% higher than last year (Allendale +4.2%).
From the average trader perspective this would seem to be pretty bearish. It would suggest that the big drop in placements we have all heard about, which started in May, is over. While this number sounds bearish it must be taken into context. This is compared against October 2012. You may remember that September and October placements in 2012 were both record lows for their respective month. Friday’s number is being compared against a record low! Anything we put in front of it will appear big.
The second issue that must be noted is that October placements are slaughtered anywhere from mid-March through early August. This supply deficit we have discussed so much will hit its worst point in February and March. Even if some of these October placements hit in March, that is only one of the months that makes up March slaughters. Our message here is there is nothing can be done to stop this problem.
As it stands today, February 2014 futures are implying a $131 trade, only $3 higher than this year’s end of February pricing. April 2014 futures are holding a $4 premium to this year’s end of April pricing. What really confuses us here is that June 2014 futures are holding a $9 premium over this year’s pricing. This makes no sense. The supply deficit, and the need for a $7 to $12 premium should be in the February and partially the April contract. In reality there will be only minimal supply tightness lined up for the June contract.
While the recent break in futures is scary, and has really shaken a lot of people, there is nothing we can argue from a fundamental perspective that justifies the current pricing here. Yes, beef is struggling at the retail counter right now. This is a relatively normal occurrence in November. However, when you think about the beef supply deficit we have discussed, the potential PED problems hitting December slaughters, and then regular one or two winter storms shock the cattle market, we must suggest this is a long-term buy.