Hogs May contract collapse not as bad as it seemed

Livestock wrap-up for Wednesday, May 28.

Hogs: The May hog (CME:HEK14) contract, which expired on May 14, collapsed a few weeks before expiration as traders realized that cash hogs were not near the start of their expected rally. June futures are in the second half of the same process. Traders are already in the process of attacking the premium in July (CME:HEN14) futures. While PED is a factor in today’s slaughter mix, it is no where near the levels the trade expected at this time. Slaughter has been down only marginally in recent weeks (vs. last year). What little PED effect is seen in the slaughter mix is completely offset by producers adding almost 20 lbs. to each animal now. As we have said before, if USDA’s March Hogs and Pigs survey was correct then the correct summer hog price is $105. That was actually today’s price posted on the morning Iowa/Minnesota report for cash hogs.

We should not forget that this is still a very good price. It still represents a premium to last year. The question about PED, and when/if it will be a factor again, is a valid one. Today’s news that the first official case of PED returning to a farm had no market effect. Until we actually see slaughter take a serious dip and actually see a few weeks of a 10% year/year decline the market will not believe that PED is an issue. As you remember we had a dramatic ramp up in reported PED cases from the initial reports in April of 2013 all the way into February. The peak for the week ending February 6 was 315 “findings” in the weekly reporting system.

As we have discussed numerous times these reports are a problem themselves. There is no clarification in the report about how many hogs or locations in a unit represents a finding. In addition some of these could be repeat tests at the same farm. Having said that, if the peak week was on February 6 then the peak week of slaughter impact will from four to six months later. Market hogs have a 5 1/2 month birth to death timeline (a little over 6 months on slow growers). Many of these findings were from the nursery unit which is why we discuss a 4 to 6 month lag.

Theoretically we should see the wave of these numbers rolling through the packing plant from February through August. If they do hit then the summer hog price will hit back to $130. Until something changes we should expect to see futures peel off their premium to cash.

Cattle (CME:LEM14):
Futures reacted about as could be expected today. Wholesale beef has picked up about $11 since its temporary bottom posted earlier this morning (including gains this week). It has picked up a little more than half of the big price drop posted since the March 18 all time peak. There is the potential for another week and a half of higher beef trade remaining before summer grilling season takes a hit due to warmer weather in later June. Whether that helps out cash cattle is another issue.

As noted previously, in 8 of the past 12 weeks boxed beef did not go in the same direction as cash cattle. Even after discounting boxed beef we can find a little support on the cash cattle side. Though yesterday’s showlist count did increase, it was about half what it should be increasing. Our expectation for this week’s cash is for $1 lower trade. That is actually not bad. If feedlots were marketing numbers on a timely basis we would be looking at $2 lower this week. In the short term futures traders have been shaken a bit by the past five days of selling. We really have not broken this market too much though.

Futures traders can argue that summer contracts already hold a discount, as they should, and that we have not seen “waves” of market ready cattle hit the packing plant. That is certainly true. However, our window of grilling demand will be closing in two weeks. That will hit about the same time as the normal increase in numbers hit (exaggerated by the may delayed marketings).

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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