Long-term hog supplies supporting prices, while cattle points lower

Livestock Report

Hogs: With all of the interest in cattle Wednesday, much of the trade may not have seen that new highs were posted in all 2014 contracts. This market continues to post sharp gains on the assumption that future pork supplies are ready to drop off the cliff. As a reminder, hog supplies are not low right now. In fact this week’s kill is 2.5% over last year (due partly to weather issue last year in this week). The point still stands though that we don’t have tight supplies “right now.”

There has been a lot of discussion in recent days in the industry about the April contract. The industry has now fully accepted the idea that PED will not be just a summer/early fall issue but will also be an issue for March and April.

Later this week, one of our favorite livestock market reporters will release an analyst poll on slaughter levels for each quarter this year. We are eagerly looking forward to seeing a whole-industry guess on where slaughter would be without PED and how analysts see it post-PED. We will work up new price projection scenarios for you on that average guess number.

As it stands now, we still have to ask how high is too high to buy? We have been out of this market for five days now without a dip to get long again. For the April, we just are not touching it…Rich Nelson

Cattle: We noted before that either last week or this week will have the smallest supplies of the year and suggested that a peak in prices would be make over the next eight days. What we did not see was the severity of the last portion of this rally.

The only trade reported Wednesday was a $152 from a Nebraska feedlot pulling cattle down from Minnesota. That was over last week’s $147 for NE. As we did not see trade in the remainder of Nebraska, or any numbers for Kansas and Texas, the market made the last push to see if that would garner sales. On a realistic basis, this $152 reported today is the equivalent of $148/$149 in the South. This would be the same relationship posted in the week that peaked the January rally. That one saw a $150.50 peak in the North while the majority of numbers moved at $148.

There is a little different setup between the January peak and this late February action though. The January peak also had some demand pull to it. Retailers in the Northeast were socked with two weeks of heavy snows and were restocking. This came in addition to a slight supply drop off (cow slaughter/cold weather concerns in the Plains).

In addition, many of them came into January short-ought as they were assuming beef prices would fall in Q1, like what happened last year. In January, choice beef hit $240 and select was at $237. This time around we are mainly seeing a supply decline. Wednesday's midday beef report showed $219 and $217 for those categories respectively. While packers were eager to buy cattle last month the same cannot be said this time around. By itself, that is not a reason to be bearish. The other issue here is how long our supply deficit lasts. This exact week was the Q1 low last year at 564,000 head. By the end of April the kill was up to 625,000 head. This is part of the normal supply increase that is seen. Yes, this year’s supply levels will certainly remain under last year all the way through May. The issue is the seasonally, numbers build from now on out. We are very happy to see high prices for our cattle feeders. The mistake comes in assuming what goes on right now will be the same as two months from now.

As it stands now, we remain short this market via minor positions. The risk on one of those positions was filled today. We are looking for a sign of a blowoff top here and will start serious sales when that is made. Let’s be very clear here, this is not like the hog market where supplies are transitioning for big and will fall off a cliff soon due to both seasonal supply flows and PED.

Cattle supplies are tight in Q1 and seasonally increase in summer. On top of that the Sep – Jan placements will give us a very good summer slaughter. We certainly knew this week would see higher prices. The surprise is the size of the increase. However, we still stand by the statement that a peak will be made in the next eight days…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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