Live cattle touching limit up

Livestock Report

Hogs: Futures did well today. This is likely more from the cattle market touching limit up today than any new news for hogs but no one will complain too much. The 2018 contracts pushed to new contract highs while the dominant December came near its highs from Friday. Allendale has been watching this market closely for a sign it was ready to price in the coming supply. As part of this, we have been looking at cash hogs. Last week's minimal gains for cash hogs from Monday through Wednesday, then actual losses on Thursday and Friday, were a warning sign. Today's higher trade for cash hogs puts that idea on hold.

Comparing last year's fall situation to this one is not exactly an apple to apple comparison. Last year's meat production in Q4 was a clear surprise to the trade. Record supplies swamped end users who were not prepared for it. Though cash pork prices were hit the real price impact was felt on the hog end. In an effort to tell the producers to stop producing, they hit the base unit of price, the live animal level, the hardest. This year, end users have been well-prepared for the sharp down move. Also, a comparison against last year is a little different due to fall low dates. But faulty statistics never stopped anyone before so let's do a comparison.

Wholesale pork prices are currently 6% over last year at this time. More pork and higher wholesale prices is a heck of a deal. Higher hog prices are not a surprise. The strength of these gains has been impressive. Compared with last year's cash hog price we are 43% over. A lot of that issue is the different fall low dates. These new plants are having an effect on the market. We will be very interested in these comparisons when we are at the peak supply for the year, in just a few weeks. Where the cattle market can argue the worst is behind it, we can't say the same for pork.

As we have noted before, the futures are not pricing in much of a break into November. Typically, after the October Pork Month rally, prices fall right back down and retest the previous lows. That would imply $56 on December futures. While that may be a little large of a decline, $59 is still reasonable based on a 2.6 million head kill up ahead. We will still stand aside for speculative trades.

Cattle: USDA's summary report for last week's activity pegged the average price at $106.98, up $6.11 from last week. It would be safe to say all of the Friday PM sales were done at $118 and $119 but these were offset by the few sales before that point. That was the biggest one-week price jump since the spring put in its peak, from $136.22 to $144.60. USDA counted 110,446 head of free market cattle being sold last week. That was over the 95,400 from the previous week but over the 127,840 from one year ago.

Adding a little confusion to the mix, today's show list estimate ran 24,000 head over last week. That would normally be considered a bearish influence for this week's cash cattle trade. Instead of calling this week's cash lower, we will suggest this week's trade may be limited to a $1 to $2 gain.

There was a good demand buildup for ready meat at this time. From mid-August - September, buyers were procuring for the mid-October through early December timeframe. We can say that a larger share of ready beef was spoken for. Additionally, Friday's GDP report showed a 3.0% growth compared with the 2.5% expectation.

While demand is certainly an issue here we would suggest that much tighter than expected supplies is the real deal. Weekly kills fell from the 648,000 head peak five weeks ago to 617,000 last week. We should be at +630,000. On top of this, weights are down 2%. Last week's beef production, slaughter x weights, was 1.5% under the previous year. We should be at +3.0%. It is this 4.5% supply deficit that is the main price mover.

The Monday afternoon USDA report, weekly comprehensive boxed beef, suggested end users last week procured 68% more beef for the 21 to +91 day delivery timeframe than last year. Buyers slacked off the week ending October 6 and again the 13th. They were back in two weeks ago and also last week. This will help keep price declines limited into the end of the year.

Our $124 upside target for the April was filled before the Friday cash trade and today's futures. We cannot justify current pricing. At this time, we are not selling fat cattle futures. The market simply wants to be bullish. We remain a bit concerned about feeder cattle prices though. That has not changed. In fact, today's feeder price behavior was not impressive. Strong AM gains were made but the market closed on its low. We will discuss feeder hedges in the coming days. 

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.