Lean Hog Fundamental Support(CME:LHQ4): Last week we started the commentary by noting there has been no effective change yet in this year’s massive weight problem. Though dressed weights have fallen by four pounds from the spring high, this is a seasonal issue. They are still running 5% over last year. That is the same increase as when we were at the spring high. This has given packers a little more power in the weekly negotiations this month than expected. Today marks day number five of lower cash hog prices.
This week may run a slightly larger kill than last week’s 1.833 million head run (the lowest since 2006). That does not quite solve the question about hog slaughter over the next three weeks though. We should be seeing PED problems in the slaughter mix actually offset the seasonal rise in hog numbers. That won’t be the case by mid-August though. That is the transition week that separates tight summer supplies with heavy winter supplies.
In other words, we have only three weeks left to officially put a top in this market if not there already. In Thursday’s session of the AgLeaders Summer Conference, we will be discussing hedging for deferred contracts very clearly.
Live Cattle Fundamental Support(CME:LCQ4): The trade was expecting today’s showlist numbers to be little changed from last week. Instead the Plains as a whole say a sharp 25,000 head decline. This was mostly a Nebraska problem where numbers fell by 27,000. The short term reaction is easy. We have a sharp supply deficit in the beef complex that will not be fixed this week. It opens the door up for cash trade steady to higher now later this week. Typically the mid-July cattle kill is the second largest of the entire year. Instead last two weeks were the smallest numbers since late April. For now, bulls remain in control. We will continue to hold from short futures positions.
From a longer term perspective, this news is also illustrative of the bigger issue in the cattle market. Analysts, and the industry in general, don’t have a grasp on summer supplies. We should be drowning in beef supplies right now. That is from both a seasonal issue as well as from the heavy October – February placements from prior months. The 6% year over year drop in slaughter in June has now become an 11% decline for the past three weeks. Instead of June being an anomaly that would be made up for with extra July and August marketings the trade has to suggest those heavy winter placements from October through February simply did not happen. Though this market “should” be seeing those supplies and “should” be heading towards $145, it is not.
In other news, Allendale released its Cattle on Feed estimates last week. We see placements running 7.2% lower than last year for the month of June. That makes it four months in a row of lower placements. Tight supplies of steers still outside of the feedlot and even worsening heifer hold-back are the key issues here. There is no argument in the industry as to the tight supply from September on.