Hogs at key junction, and the story behind cattle kills

Livestock Report

Hogs(CME:LHJ14): Without sounding like a broken record, there is still no sign that our problem with the front-end hog supply has been fixed. This week’s kill is running 53,000 head under last year in the same period. Severe icing in the Southeast Wednesday, and the coming storm hitting the Northeast tomorrow, are this week’s problems.

We cannot fault those who are concerned with the premium that April holds to current cash. Keep in mind the April contract, which settles to cash on April 14, will not be caught up in the PED problem period. That should be beginning right after that contract expires. Those who are looking for sharp declines in hog numbers in the coming summer and fall due to PED have some more firepower.

The Ohio Department of Agriculture has confirmed the finding of a new virus that is similar to PED. Found on four farms in January and early this month, it has been classified as Swine DeltaCoronavirus (SDCV). This is similar to a finding in Hong Kong in 2012. It is characterized by diarrhea early in the infection period.

Lastly, Friday marks the expiration of the February contract. This also means our short puts should be expiring with no value (positive for our position)…Rich Nelson

Cattle(CME:LCJ14): Though we assumed the Schuyler, Neb., plant was slaughtering cattle Wednesday morning, a company official noted that is still a day-to-day decision. While they are processing carcasses, it appears the slaughter end of the operation is still dealing with problems from the overhead water lines. With that issue, and the general panic among packers over negative margins, this week’s kill is running a full 12% under last year at this time. This news is helping to mute the supportive effects from what would be the smallest supply of cattle offered for the whole year. As a reminder, the smallest non-holiday kill of the year is in the spring (highest prices). After mid-March we see a seasonal increase until the heaviest numbers of the year hit in June.

For this week, futures have been trying to price in the idea of a rebound in cash cattle trading. Bids in select areas are at $141 while there is still talk of $142 or $143 potential. This is great-sounding news, but we just can’t think it will happen, or that it will last. Boxed beef has not stopped going down. Wednesday’s midday report showed the lowest price since Jan. 7. In that particular week, cash cattle traded at $139 and $140. We just find it hard to believe that packers would shoot themselves in the foot and pay up right now.

The last thing that really sits on this whole argument is the U.S. consumer. Are they really to start paying up for that January beef rally? We remain bearish for the pull down into summer. In a small piece for news for the industry, USDA’s statistics arm announced they would re-instate the July Cattle report. As you remember this bi-annual report, commonly called the Cattle Inventory, was reduced to only a January publication last year due to the sequester…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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