New highs reached in lean hog futures

May 23, 2017 09:15 AM

Lean Hog Fundamental Support

New highs were reached for the July and August lean hog futures on Monday. The trade is still discussing the idea of slackened demand from end users for beef at these higher prices and a little more interest in pork. As we noted a few weeks ago, there is not as much switching between the two than analysts thought years ago but there is something there. It has also been shown in the weekly feature numbers.

Cash hogs were down -0.56 Monday, +0.21 Friday, and -0.86 on Thursday. Though cash hogs have another $7 to $11 rally into mid-June, the trade may wonder if this is a short-term stumble or the sign of something larger. In our opinion, this is not a major issue. Cash pork prices have been higher in 16 of the past 17 trading sessions. Monday's jump was 1.45.

The monthly Cold Storage report was moderately bearish. 599.112 million lbs of pork was found in the nation's freezers at the end of April. This was over the 586.4 trade estimate (ALDL 581.2). The monthly change in stocks is a 50 million lb. increase over March. The normal increase is a 33 million increase averaged from the past five years.

We are moving out of our bullish viewpoint for this market into something a little more neutral. Between now and the end of the month we'll take action on the hedging side. Anywhere in the +$77 range via summer futures is a valid price to work from. Our focus is the October and December contracts. Additionally, feed costs hedges are needed before a summer weather rally.

Live Cattle Fundamental Support

USDA's cash cattle summary report for last week's activity showed an average price of $134.26 for all grades. That was $3.02 under last week's trade. We are now $10.34 off the peak of the year posted two weeks ago. CME Group live cattle trade something closer to a 50%/50% mix of cattle. Those numbers were pegged at $134.08, $3.69 under the previous week. That is $10.48 off the peak from two weeks ago.

While cash cattle struggled last week, and will be down again this week, much of the trade is monitoring the June contract. We are two weeks away from First Notice Day, the start of the delivery period where cash and futures converge. Monday's June settlement, at $123.95, and a normal -$0.46 basis, implies a $123.49 cash trade in six weeks time. Bulls feel this market must prove to them that cash is going to break $10/$11 over the next six weeks.

Bulls can also point to Friday afternoon's news that a little more progress was made in the China beef deal. We are still set for a July 16 start date for US beef exports. On Friday, the trade learned that beef for China will have to come from animals with no growth additives. Additionally, a farm to package ID system will be needed. We see a two-tiered production system like in hogs. A few farms will follow this protocol and they will be paid for it. One issue of concern is just how many cattle are ready for this right now and whether an approved ID system is pushed through quickly. We fully support the idea that US beef to China will be helpful in 2018. How many pounds are shipped out from July 16 through September is a question.

The weekly count of showlists, the number of market ready cattle offered to packers each week, fell by 26,800 head from the previous week. Don't panic. These are numbers bought this week and harvested at US packing plants next week. Next week's kill will take a hit due to the holiday. This is a well-known issue and will not impact price.

Cold Storage at 2 pm was moderately bearish for beef. 458.460 million pounds of product was counted at the end of April. This was over the 444.4 trade estimate (ALDL 445.6). This was 6 million under the previous month. The five-year average change is for no change in beef stocks. During the past five years, the April change ran from a 15 million lb. increase to a 14 million lb. decrease. Monday's report stops the string of three months in a row of sharp monthly beef drawdowns.

We can see gains for tomorrow and maybe Wednesday ahead. On Thursday, we will get the weekly weights for the week after the big rain/snow week. That should show a rebound in weights and may pressure price a little.


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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.