Hogs: In the past couple days, we shed light on the seasonal issue with this hog market. Both February and April lean hogs have a well-known rally between Dec. 16 and Feb. 1. Before we start championing a bull position, we wanted to dig into the numbers.
Over the past 15 years the February contract has rallied 10 times in that period. Of those 10 higher years, the average rally has been 10.2%. It must be pointed out that one of those years was the 1999 contract (coming off the 1998 winter liquidation). If you take out that 52% rally, then the remaining nine years posted a more reasonable 5.5% gain. Put on top of this year’s Dec. 16 close of 86.62, then you have a projection of 91.35. That’s not too bad of a rally.
We bring this seasonal issue up because markets generally bottom at the worst of things. Right now, we have much bigger supplies hitting the market than we should have, and there are two weeks of slaughter disruptions up ahead. It is not out of line to raise the possibility of a rebound around this time.
Cattle: The conclusion of the Federal Open Market Committee meeting came with a few more questions than answers for traders. The Fed will start its taper with a small test of the water with a reduction of $10 billion per month from the current $85 billion per month pace. No one, either for or against the taper, was really satisfied with this movement.
For our interest, estimating consumer financial health and their willingness to buy meats, we are still not swayed either way. That they started the taper is seen as positive for the economy; they suggest it is improving enough to start. On the other hand, that they are reducing it by such a small amount shows they remain concerned enough over the economy that they feel artificial support is needed. This move also fits into our discussion this week regarding consumer financials. Though their disposable income is higher than last year at this time, their confidence in financial conditions is only equal with last year.
For short-term fundamentals, we must point out the short-term beef situation is still not quite right. Packers are doing their darnedest to cut next week’s kill enough to fix their margin problem. This comes as they prepare for a rough year ahead. Even the very conservative USDA is estimating 2014 beef production will fall 5%. With these concerns, feedlots in Nebraska traded cattle at $129. This was a bit unexpected. The industry is waiting for more information on volume to see if these were quality numbers or not. Keep in mind the Kansas through Texas traded last week at $131. Nebraska typically trades at a $1 premium to the South. If you take this information at face value, then would that imply the South will trade all the way down to $128? That’s why we are a little skeptical here.