Slaughter levels little under June projections

August 8, 2017 10:59 AM
Weekly Meats Analysis

Lean Hog Fundamental Support: Futures continued their rebound from the second half of last week through today. As we have discussed here, slaughter levels in July ran a little under where it should have been given the projections from the June Hogs and Pigs report. Cash hog prices have fallen on the normal seasonal rise in supply. However, they have not hit the levels where they should be by now. That has loosened some of the pressure on cash hog prices.

CME Group futures are a cash settled contract. It is settled to the two-day Lean Hog Index. The LHI is a nationwide measurement of cash hog prices. Through Friday's cash hog trade the LHI will be at 86.12. That was reported by the CME. Our forecast for the August, released on the July 27 session of the AgLeaders Conference, was $84.

The other problem with this August expiration is that the trade will now question whether the October is also undervalued. Traders not quite sure of the supply facts may then point out that the October comes on board with an $18 discount to cash. It is very often that the October sees an unnatural week-long rally during this August expiration period. We fully suggest that discount is needed. In fact, our $65 target for the October implies an even larger discount is needed. We suggest not to trade the October or December contracts as summer contracts. They are very different in supply and there is also some difference in demand. However, in the short term, bulls may run the show for a week here.

Allendale sees expiration prices for the various contracts at $84 on the August, $65 on the October, and $56 for the December. For 2018 we see February at $62, April at $66, May at $72, and June with $76. We are satisfied with the hedges on hogs out through February that use the December contract. As of the open of June 5, at the equivalent futures price of 63.07 using December hog options, these hedges should be in place. As of the July 3 open, we also have feed cost hedges using December corn options. RN

Live Cattle Fundamental Support: Cattle futures were hit hard today with the October down the limit on the close, not settlement, and the others $2 lower. The supply situation is a concern. Officially the showlist number for the week was 6,600 head smaller than last week's showlist. Frankly, that does not make any sense. Last week's free market sales ran 79,251 head. That was down from the previous week's 99,721 and also last year in the same week at 102,309. Showlists should be higher, easily. On top of the low sales last week we also have the seasonal supply increase to consider.

The weekly slaughter estimate from USDA found 11,000 more head than we expected this morning for a 634,000 head total. Both the 117,000 and 52,000 head estimates for today and tomorrow were larger than expected. This 634,000 head estimate is the largest in five weeks. Instead of a slump in numbers offered at this time, like that seen in the two previous years, numbers are building back up. If this continues, which we expect it to, we'll be up to 640,000 by the end of the month and eventually up to 655,000 this fall.

USDA issued the June trade data today. We exported 239 million lbs of beef in June, 12% over last year. That is over the 3% gain posted in May but under the 15% year over year gain in April. As much of these exports were likely made in the time when we had great numbers earlier this year, we would suggest this is not representative of the current situation. Good to see but more likely already expected. Imports ran 295 million lbs. That was 4% over last year. That beat the -3% and -8% year over year changes in May and April. This would be a surprise. These orders were likely made in April and May when we had high beef prices. This should have been a low import month.

Allendale's official projections...August at $114, October at $108, and December of $110. For 2018 we have February at $112, April at $119, and June at $111. For feeders we see October down to $142 and April at $135. For calf prices, which have a completely different seasonal, we see October sold animals at $160, currently $168, and 2018 October sold animals at $155. Cattle feeders following Allendale's advice should have hedges on via August fats in the $120 - $123 range. Feed costs should be locked in via December corn options on the July 3 open when December corn was at $3.95. RN

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.