Cash hogs gaining, while cattle is looking low

Live Hog
Mixed futures action was noted. As discussed this morning, only cash hogs have been gaining in recent days. Cash pork showed a net drop in price last week. If you are going to argue for retail featuring as a bullish driver, you should probably see better wholesale pork than this.

On a seasonal basis, National Pork Month rallies last about 2 1/2 weeks on average.

The monthly release of meat trade data on Friday showed August U.S. pork exports at 418.004 million lbs. That was minimally higher than last year. Exports in June were +4% while July levels were -3% with last year.

It is our belief that this rally in hogs is ending. We may not go right back down but certainly, need to see better news in this market quickly.

Live Cattle
December live cattle futures came within 15 cents of retesting the September 22 mini-price peak. The February and June contracts pushed over that price point. The trade is excited about Friday's $109 sales in the South and the $110 and $110.50 trades in the North. Last week's average cash cattle trade was $109.45 on a live basis. That surpassed the previous week's $108.01. We are five weeks past the year's cash cattle low of $104.66. Last week's trade strengthens the bull case that the year's low may be in place (ahead of last year's low).

Today's shortlist estimate showed a surprising 10,100 head decline compared with last week. After a week where they pulled out much higher than expected prices, this would seem to imply even better news ahead. We are not quite sure that show list number is accurate. Don't forget that the way we put the cash cattle low in what was not quite the best way. For the three week period from August 25 - September 8 cattle feeders only sold from 47,431 - 74,958 head of free market cattle. It was not until prices had picked up a little that they made up their lax marketing pace. The volume sold in last week's cash trade was only 75,627 head. That 16.584 head under the previous week (16,394 under last year too). We would suspect that the numbers are there but what has been chosen to be "shown" may be intentionally small.

The weekly Comprehensive Boxed Beef report is the one we occasionally cite when discussing how aggressive end users are with beef procurement. In the past four weeks the amount of wholesale beef procured for delivery 22 - 60 days away, what we often call "extended delivery", ran 18% over last year. Over the same period, the 61 - 90-day delivery product was 24% over last year. Today's report, covering last week specifically, was 33% under last year. The 61 - 90-day delivery procurement was also disappointing at 37% under last year. This news is moderately bearish but we do not expect futures to fall because of it.

On a seasonal basis, feeder prices should be pushing slightly lower. On a profitability standpoint, cattle feeders would have trouble buying these animals and breaking even. But cattle feeder profitability does not make feeder prices, supply from cow/calf producers and actual demand by cattle feeders does. In this case, cheap feed and hopes that 2018 contracts are undervalued are overruling short-term concerns about profits.

Though we still suggest there is a supply issue remaining, and the prospects of lower prices later this month are still there, it is clear the market feels we are on the same road higher as seen last year just after October. Last year saw a $20 rally off the October low by the end of the year then $20 more by the late spring high. That won't be seen this time around but don't forget there are a lot of bulls out there right now. We do like the April and June futures but not 2018 as a whole.

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.