Excess pork keeps bulls reigned in, while cash cattle experience a drop in production
USDA's daily kill estimate today showed a minor revision for last week. It was brought down from 2.578 to 2.575 million head. That won't change too much. It was 2.9% over last year. This week's kill will fall, as it almost always does, but not as much as normal. Even with the planned reduction, to something around 2.450 - 2.480 million head, it will still be large. Our conservative 2.458 million head guess would be 13.7% over last year. This week's kill will be the fourth week since Thanksgiving. Including our estimate for this week, the four-week run will be 4.8% over last year. This is all an effort to clean up a small backlog of ready hogs. Let's hope the later-week snows for the Western Cornbelt don't hold up too much activity.
Since the small peak on December 5, cash hogs have lost 4.30. Wholesale pork is down 8.92 since the 5th. The fact that we are dealing with excess pork, later than usual in the year, is a problem keeping bulls reigned in.
Another issue to note is that futures already have their necessary premiums plugged in for the coming lower levels of production (seasonally). Production will fall seasonally from last week's record 550.5 productions to 510 by February. February futures are pricing in a 5% rise in prices from now. Production will fall by 7% during this time. February futures may need to pick up $2 from today's close by expiration. There is no need for a massive futures rally here, just a slight adjustment.
https://activetrader.cmegroup.com/TradingInsights. CME Group released the short Hogs and Pigs preview we did with Dave Hightower. This video series is geared for the retail speculator. Again, the trade on our neutral market approach was selling both a $74 April call and a $68 April put. This position, a "short strangle", is a sideways market and time play. For the producer side, we will be putting out more product, and prices may take a year over year fall. But with $59 breakeven at current feed costs, profits are still in store next year.
For Friday's H&P report we don't consider our numbers bearish. We have All Hogs and Pigs at 1.3% over last year, a December 1 breeding herd 1.1% over last year, and Dec/Feb and Mar/May farrowing intentions of 1.2% and 1.1% over last year. Those numbers imply a general pork production of 2% - 3.5% over last year depending on productivity gains (breeding herd and finishing weights).
Seasonally, both the February and April futures typically see a lower trade from November 30 until December 17. Our current price bias is that early 2018 hog futures are slightly undervalued. The excess supply in the right now situation keeps us from buying at current prices.