Pork at turning point, while cattle is demand driven

June 27, 2017 12:03 PM
Weekly Meats Analysis

 Lean Hog Fundamental Support: Another 20 cent gain was added to wholesale pork today. That extends this year's strong rally just a little further. More important for these short term discussions, it temporarily puts away fears that the top is in. We, and most of the pork trade, certainly do feel this is the right time. The only question is when.

Thursday's Hogs and Pigs report will help solve this looming Q4 supply question. We can make the case for anywhere from a 2% year over year increase to a 4% increase waiting for us. An expansion is still on but it is now seeing a slower growth. More details about Hogs and Pigs will be discussed tomorrow.

At the coming Allendale AgLeaders Conference in July, we will discuss the hog pricing issue in-depth. The market’s ability to do well considering this year's record tonnage is partly from higher exports and partly from better U.S. consumer demand. There is a third issue that has not gotten the press it should, the share of the wholesale price that lean hogs have retaken and the share of the retail dollar.

The summer contracts will peak when they are ready. Hedges via the December should be on as of the open on June 5 at the 63.07 price equivalent. Even with the strong July contract nobody is ready to buy the far deferred. We still plan on feed cost hedges by the end of the month.

Live Cattle Fundamental Support: Lower show lists were reported today, 21,700 head less than the previous week. That is not that much of a surprise as we have a reduced kill set for next week. As the trade is hyper-focused on weekly numbers coming in, they wasted no time in noting there are other supportive issues in the short term. Packers are sitting with quite a strong margin at this time. Any change in the supply end of things certainly could encourage them to pay up.

Another issue to note is that July is typically a little smaller on the supply end than June. This normal small setback in supply could also be used to justify a rebound. Allendale, which would be considered on the bear side, certainly was surprised by the size of last week's cash cattle decline. Just as we cannot mathematically justify much of the spring rally we cannot exact justify last week's $9 break in cash.

Last week's trade averaged $122.42 according to USDA's five area report. That was down from the previous week's $131.73. Last week's trade ended on a down note, $119 in the Southern Plains. Given the strong packer margin, moderate decline in show lists, and likely moderate sized supply in July, we could see this market taking back some of those heavy losses from last week.

We are not at all turning bullish or suggesting the price low is in. That call likely won't come for months, literally. We still have Friday's bearish placement numbers in mind, 12.2% over last year and over the past seven months, 11% more than last year. It is interesting that for now three months in a row, buying on Monday open after each COF report would have been a positive deal.

The charts still show the "double top" formation on the August contract. It implies pricing down to 106.00. That is lower than our $114 - $117 current expectation for the August.

While the double top formation is still there, and still very valid, there is also a small gap open on the August fat contract from 120.42 to 120.60. That could be used as a small rebound objective before bears retake control.

The ANFFA Brazilian health inspectors union claims there are 270 meat packing operations in Brazil that do not have inspectors. They suggest that is 6% of all facilities.

We remain bearish and will hold the $120 to $123 hedges advised in the first seven days after the main market peak on May 4. We will strongly advise producers following this plan to hold those hedges until the cattle are sold.

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.