Hogs held back by weights and cattle bearish

Livestock Report

Hogs: Wednesday's 398,000 head kill that was estimated by packers was a bit bigger than we expected. Though the snow fall amounts were not too bad for the Western corn belt, there were problems in the East. Having said that, our point still holds. Despite the problems with hog marketings, which are actually a negative issue, packers have other issues on their mind.

The beef market is not offering a product at the price that buyers are willing to buy. There is still interest in chicken, and partly pork, that was set for beef. The lean hog index, the measure of cash hogs that futures are settled against, is now 83.45. February futures appear to be correctly priced given their expiration next Friday.

For those asking about weights, we are still seeing this as one of the problems holding back cash hogs are enjoying higher prices. Last year the LHI was priced at 89.35. Though slaughter in recent weeks has been just under last year, the higher weights are giving us 2% more pork production. Take care of this weight problem, driven by both corn prices and cold weather marketing delays, and you get higher prices. We don’t see that really happening for a few more weeks. If you want to be bullish, which we do support, only trade the summer contracts…Rich Nelson

Cattle: Friday is the last day where February futures can trade at any price they want. Starting on Monday, these contracts are up for delivery. While we can all reasonably suggest cash cattle will fall from last week’s $145 into February, we now have to guess the exact amount. Excluding Tuesday’s mixed to slightly higher tone to boxed beef, this market has been in a free fall since Jan. 22.

February futures, with a normal basis for the end of February applied, are pricing cash cattle at $139.13 ($139). Our target of $140 is pretty darn close enough to call it done in our book. As we prepare for February to be written off the active trading roster it is a little surprising to see the April lined up at a very similar price. Today’s settlement, with a normal end of April basis applied, assumes $139.62 ($139/$140). This is quite odd for us as this market is typically in the spring to summer decline by the end of April. While we will point out that slaughter levels will remain tight into mid-March, that won’t be the case for later April.

For shorter term issues some may suggest that this week’s moderate snows in the Eastern Plains could affect weight gains. It certainly is an issue to monitor, but we are not prepared to say it is a reason for bulls to retake the stage. We are on the sell-side for fat cattle/feeder cattle/calf hedges as well as for speculative trading…Rich Nelson

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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