Bitter cold affects cattle/hogs differently

Livestock Report

Lean Hogs

Unlike cattle, hog futures didn't get too excited about the cold temperature issue. As noted in the morning comments, we will not at all ignore the struggle with loading hogs in the face of bitterly cold temperatures. On the other hand, without any precipitation we won't start calling for marketing shortfalls out of the hog barns. We do not suggest this will be a problem in reducing hog weights like with cattle. In fact, if it continues for a couple weeks, we could argue it would start expanding weights if we keep those hogs indoors.

Last week's kill was revised down from USDA's initial 2.466 million head estimate on Friday to 2.460. This will not impact the trade. It is still abnormally large for this particular week, 13.8% over last year.

Cash hogs rose 0.19 yesterday. Today's trade posted a slight loss.

Traders are hoping to ignore Friday's Hogs and Pigs report. It showed the nation's hog herd 2.4% over last year. The projected slaughter numbers for first half of 2018 will only need to be bumped up a little due to this report. Many will note the September HP report was incorrect about four weeks after its release. Some suggest the same is set for this one. Also, traders are trying to ignore the +2.8% and +2.3% year/year gains for Dec/Feb and Mar/May farrowing intentions. That could provide some trouble for prices in second half 2018. Traders instead paid more attention to the bullish Cold Storage. The five-year average drawdown for November is 45 million lbs. Today's 505 estimate from USDA implied a record drawdown of 93 million lbs.

Some are questioning whether pork demand in 2018 will completely offset the rising supply issue. We are coming close to that perspective but not quite the whole amount. Seasonally, both the February and April futures typically see lower trade from November 30 until December 17. Our current price bias is that early 2018 hog futures are slightly undervalued. The excess supply right now keeps us from buying at current prices.

Live Cattle

February live cattle futures pushed to limit up today. The settlement was only 10 cents off that peak value. The market opened steady to slightly lower but spent the remainder of the trade pushing higher. The quick cold snap in the Plains, in many cases now 15 degrees below normal, was seen as the factor. After weeks of above-normal temperatures, this is the first roadblock to rising weights. It is normal for cattle markets to see two winter related rallies. Through experience, if the rally also includes precipitation, you don't stand in front of it. If this is a normal "buy the rumor/sell the fact" type of trade, then you would expect bulls to run the show until Thursday or Friday, then lower trade after the peak temperature problem early next week.

Friday's COF report was traded for a few minutes off the open this morning. The November placement is 13.9% over last year's November. That was the largest November placement in 10 years. In recent months, it seems that buying bearish COF reports on the next day's open and selling on the Friday of that week has worked very well. It is not that surprising. The November placement here projects supplies that fill a part of the May through September slaughter. In the market's viewpoint, that is ages away. The in-your-face issue here is the cold weather.

One of the closely followed economic reports that is viewed as a marker for beef demand is the monthly Consumer Confidence released by the Conference Board. The trade expectation is for a drop from last month's index reading of 129.5 to 128.1. The trade is aware that last month's report held the same pre-report expectation before a positive release was revealed. Last month's 129.5 reading was the best print since November 2000. The December update is scheduled for release tomorrow at 9 am CT.

Last week's cash cattle trade averaged $119.97 according to USDA's summary report today. That was about unchanged with the $119.71 average the previous week.

At current futures settlements, the market is pricing cash cattle at $120 this week, $121 in February, and $123 in April. These numbers are under our $124 April futures expiration projections ($125 cash). We are still trading at a premium to last year's $115.14 cash trade in the same week.

The feeder cattle chart still shows a Head and Shoulders top that projects to 134.65. We have no problem with lower feeder trade as it fits perfectly in with seasonals. Feeders don't follow fats at this time of year.

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.