Pressure on cattle prices coming?

Overnight lows fell down to -1 in Dodge City, KS on the 12th.

That was a full 33 degrees under normal. Last night’s 12 degree reading ran 18 under normal. On the bullish end, we have set back weight gains through almost all of the Plains. It is not a major problem right now, but certainly is a setback. We have another cold night ahead then a warmup. By Friday, the overnight low will be up to 31. That will be 3 degrees over normal. Temps will then meander close to normal. Look at this from a market psychology perspective. We just had a strong rally, which continued into yesterday, on this cold snap. Officially this cold snap has about ended. Should we expect some pressure on prices at the end of the week?

For the very short term, we can point out bulls have a lot of strength right now. We have few numbers being marketed and have concerns that these heavy finishing weights, which the market was depending on to ease the short supply, will begin to ease. Feedlots gained $3 last week and have hopes for steady to $2 more this week. New contract highs were posted yesterday. We remain solidly bullish for a move from December into February. Our upside target is $174 – $176 for the February. For the short term, yes bulls are in control but are we a little ahead of ourselves with warmer weather ahead?

Tyson Foods reported earnings yesterday for the July – September quarter. This was also a year-end filing for them. The company reported $4.429 billion in sales in the latest quarter which was sharply over the $3.745 from last year in the same period. Actual volume of beef sold was 2.6% lower than last year. Their average price sold was a strong 21.5% over last year. From these sales the company brought in income of $153 million (3.5% margin). We must remind you that during the summer, July and August, beef processors benefited from demand for wholesale beef exceeding the demand for live cattle (CME:LEZ14). It was a demand pull situation. That has changed since early September. Now it is the live animal level where the gains are being made. That has tightened up margins quite a bit more than these numbers.

Lean Hog Fundamental Support

We are currently trading cash hog prices $1 over last week’s low.

There is a discussion in the industry about this representing a low for the fall. The 10 year seasonal low comes in on the 24th. While a little earlier than normal this is not that much out of line. On the bear side, we have a big kill hitting this week ahead of next week’s holiday slowdown. In addition, futures are already holding a good premium to cash hogs (CME:HEZ14). This is already priced in. On the bull side, after Thanksgiving packers will be coming back with a full kill week and what could still be a respectable margin.

Tyson Foods is both a pork producer and a pork processor. They don’t differentiate between the two activities in their financial statements, unlike Smithfield. In yesterday’s quarterly earnings release, covering July through September, they reported $1.627 billion in sales for the pork segment ($1.402 last year). Volume of pork sold was 0.3% lower than last year. The average price sold was 16.5% over last year. On these sales they managed $99 million in profits. This 6.1% margin was over last year’s $68 million profits and a 4.9% margin. It would be safe to say that, between the two activities, hog production this summer had the biggest margin.

About the Author

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.