Hogs affected by FDA guidelines, while cattle sets up for run

Livestock Report

Hogs: Wednesday morning the Food and Drug Administration announced an ambitious plan to end routine antibiotic use in animal agriculture. They have asked pharmaceutical companies to change the labeling on products to now not show provisions for livestock use. Officially this program is voluntary. Companies have three months to inform the FDA whether they will comply or not. If they approve, they will have three years to make the transition.

Essentially this is an end-run for the administration that does not want to fight farmers directly. As you know, because the movement into year-round indoor housing for hogs took off in the 1950s and 1960s, producers found that continued use of antibiotics through all phases of life gave the side effect of improved weight gains and days to market. In recent years, there has been concern that this practice is now leading to bacterial resistance to these products. Former FDA directors have said the evidence of this is clear. The National Pork Producers Council has stated there is no scientific evidence to speak of. The EU banned these products in 2006.

While opponents do raise some valid concerns, we do have to point out this is essentially a government mandate that does not come from active public discussion or lawmaking process. From a production standpoint, such a move would take 2% to 3% off where supplies would have been during that time. This would minimize the expansion that would hit 2015 and 2016 due to lower grain prices.

Cattle: Packers put up initial bids for this week’s cash cattle dealings at $129. That implies they will buy cattle this week at $131 or $132 (last week was $132). This news could be taken as another negative sign for the market. It does not mean cash cannot trade higher; it simply means packers will be hard negotiators.

For “right now,” they are not out of line. Supplies of market ready cattle have not started faded much “yet.” In addition, there are plenty of valid concerns about beef demand in the first quarter. There is also a slightly bearish carryover from USDA’s revisions to the beef balance sheet. Yesterday, USDA raised its estimate of 2013 beef production by a moderate 85 million lbs. and to the 2014 numbers by 115. The changes eased next year’s supply problems by just a little. Keep in mind this big deficit is still there.

On another note, traders watching seasonals will note February futures typically decline from late November down until this week. While we must respect the short-term mixed to slightly bearish issues here, we must also point out nothing regarding this Q1 supply problem has really changed. Even using the USDA’s very conservative approach, they still have a 5.7% decline in beef offered to the U.S. consumer next year!

Futures are currently implying a $130 or $131 cash cattle market at the end of the month and a $132 trade by the end of February. Read that clearly, with no one (Allendale or USDA) arguing about the supply problem directly ahead, this market is pricing in almost no premium. In the face of this, we have had research subscribers ask about our positions. The risk on one of our six long-type positions was filled yesterday. This does not diminish our bullishness as there certainly was a chance this market could see pressure for a short period of time. Additionally, keep in mind we are only at the mid-point of our long term trades in this market.

We still suggest this cattle market will be the agriculture trade of the winter and plan to increase the size of our positions. As with trades that we recommend, all will have a risk point.

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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