Livestock Call by John Otte

Cutout gains lift fed cattle futures, feeder cattle follow fed cattle higher, sharply higher midday pork cutouts reverse lower to dehorn hog bulls

Published on: Apr 17, 2014

April 17, 2014
Opens
Fed cattle
, steady
Feeder cattle, lower
Lean hogs, lower

Wall Street looks to open lower. Following three days of stock market gains stock futures turned lower overnight as disappointing earnings reports from Google and IBM late Wednesday dampen tech stock optimism.

Overnight livestock futures trade points steady in fed cattle, lower in feeder cattle and hogs.

Cash fed cattle. On Wednesday USDA reported limited negotiated cash trade on light demand in the Texas Panhandle, with a few early sales at $146. Trade was mostly inactive on light demand in all other feeding regions.

A dressed bid at $240 surfaced in Nebraska Wednesday morning. That bid bought very few cattle.

Wednesday's morning choice boxed beef cutout was up 30 cents at $223.16, with select up 82 cents at $213.96. Afternoon cutouts were higher on moderate to fairly good demand and moderate offerings. Choice was up 89 cents at $223.75, with select up $1.33 at $214.47 on 206 loads.

USDA estimated Wednesday's cattle slaughter at 115,000. Slaughter so far this week of 348,000 is down 2,000 from last week and down 15,000 from a year ago.

Futures markets will be closed tomorrow for Good Friday, so the bulk of the week's cash trade will likely occur today.

Cattle futures. Fed cattle ended higher Wednesday, amid steadily rising wholesale beef prices. Lift from stronger cutouts has offset down draft from expectations supplies of market-weight animals will rise in the weeks ahead.

Rising cutouts support sentiment that demand for burgers, roasts and other products could rise as temperatures climb seasonally across the country. Firming cutouts offset concerns that spring and summer slaughter supplies will rise following upticks in fall and winter feedlot placements.

Beginning of grilling season should coincide with Easter. Both events should be conducive to beef demand as Christians, some of whom have trimmed beef consumption in observance of Lent, get back on full feed, so to speak.

Sharply higher morning hog cutouts bolstered beef. That support waned as afternoon pork cutouts turned lower. Wholesale pork had steadily risen to fresh all-time highs until softening over the past week. Beef prices are typically more expensive per pound for retailers. But the two proteins become more competitive as the price gap between beef and pork narrows. The spillover lift may be both real and psychological.

April fed cattle rose 47 cents to $145.75. Most-active June climbed 20 cents to $135.62.

May feeder cattle rose 12 cents to $179.90. Most-active August was the big gainer, rising 40 cents to $182.97.

Bottom line. Modest late week cutout gains could offset slightly larger show lists to result in cash trade near last week's prices.

Livestock Call by John Otte

Cash hogs. Compared to Tuesday, on a plant by plant basis, Wednesday's weighted average base prices were $1.32 to $4.39 lower. Trading occurred throughout the full range from $105 to $116 on slow market activity with light demand.

USDA's afternoon reports showed Wednesday's weighted-average:

* National base price down $2.09 at $114.70.

* Iowa-Minnesota down $2.64 at $114.89.

* Western Corn Belt down $2.67 at $114.67.

* Eastern Corn Belt was not available.

Price changes are compared to USDA's afternoon report for Tuesday.

USDA estimated Wednesday's hog slaughter at 412,000. Slaughter so far this week of 1.204 million is down 21,000 from last week and down 51,000 from a year ago.

USDA tallied last week's Iowa-southern Minnesota barrows and gilts at 285.7 pounds, up from 285.5 the previous week and 9.2 pounds heavier than the 276.5-pound average a year ago. Heavier weights alone boost pork output by about 3.7% per head.

USDA reported Wednesday's morning plant cutout up $2.38 at $124.11. Afternoon cutout values were:

FOB plant down 57 cents at $121.16.

FOB Omaha down 70 cents at $119.91.

Based on 514 total loads.

Based on the new cutout Dow Jones estimated Tuesday's packer margin index at plus $5.62 per head vs. plus $1.54 Tuesday.

Tuesday's CME two-day lean hog index slipped for a ninth straight day, sliding $1.04 to $123.08. Its recent peaks are $130.35 on April 2, $81.05 on Jan.10, $82.91 on Dec. 4, $91.48 on Oct. 24, $98.25 on Sept. 20 and $102.56 on Aug. 15. Recent lows are $79.91 on Jan. 20, $79.23 on Dec. 23 and $80.83 on Nov. 25.

Hog futures. Hogs ended mostly higher Wednesday on the gains in the midday pork value. By afternoon, cutouts turned lower dampening bullishness.

Most-active June hogs surged $1.25 at $123.75. July was the big gainer, up $1.67 at $121.65. Deep deferreds slipped.

Bottom line. Negativity from weaker cash prices, a ninth down day in the CME's lean hog index gained momentum as Wednesday's solidly higher morning pork cutout turned markedly lower.

Story Tags: usda, Corn Belt, livestock

Comments:
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  1. martie says:

    Read what Trader Dan has to say. Hogs are coming in a lot heavier. More then makes up for numbers.

  2. Chris says:

    John, it is clear after two days of trading that traders have chosen to regard the Friday USDA report as underplaying the PEDv problem. Are there past benchmarks that support this thinking (reports that were very innaccurate)? Are these traders likely to be right or is there just a lot of bullish momentum?

    • Janell Baum says:

      Comment reply from John Otte: The hog futures market fairly rapidly bouncing off Monday’s post-report limit down open says futures traders do not think Friday’s Hogs and Pigs Report was as bearish as the numbers USDA reported suggested. Bear in mind two limit moves opposite directions last week suggested traders were fairly nervous going into the report. Some market participants believe the cash hog market is the true measure of the situation. Cash market participants are in direct contact with people who sell and buy hogs, and buy and sell wholesale meat, retail meat and hotel restaurant and institutional meat every day. They likely have the best handhold on the overall day-to-day supply and demand situation. I have heard some comments along the lines of “PEDV is getting a lot of media exposure.” We, ourselves, have mentioned PEDV on numerous occasions. A possibility does exist that PEDV hype exceeds actual PEDV losses. A possibility exist that the cash hog market has over-reacted to that hype with panic buying. Such an over-reaction would spill over to boost futures. One thing is clear, hog prices are much higher than a year ago. The CME’s two-lean hog index has been up 47 straight days, rising about 63% over that stretch. Pork cutouts are also sharply higher. The last four or five days, beef cutouts have slipped, while pork is holding advancing, or at least holding steady. The point there is nothing goes up forever, and hogs have already made a tremendous surge. (But bear in mind a year ago now, Russia pulling out of the U.S. market and China restricting imports from the U.S. on ractopamine issues had prices depressed.) We’re all trying to ascertain how much upside is left in hogs, if any. A lot of people believe USDA’s summary numbers are suspect. I am not in that camp. I believe USDA can do, and does, as good of a job converting numbers people put down on surveys into a portrayal of what is going on in the industry that is consistent with those numbers. The next question is how good are the numbers that USDA uses as a jumping off point? That’s much harder to call. I’ll give you an example. Suppose a pork producer farrows 200 sows a week at 10 pigs per litter. That’s 2,000 pigs a week. The operation does that every week year in and year out, a constant 2,000 pigs a week. Now suppose the producer tallies and records the weekly pig production on Monday of each week. Most months have four Mondays. Some have five. Producing a constant 2,000 pigs a week would result in that producer “producing” 20% more pigs in months with five Mondays than in months with four Mondays. Death losses have always been tricky to estimate. Some producers count pigs that are born. Some don’t count until pigs are ready for weaning. For years, people have been complaining about USDA missing the numbers. An acquaintance says he suspects the most vocal critics are those who took sizable market positions before a report, had the report show something other than that particular participant expected resulting in that person being on the “wrong” side of the market and subsequently looking for someone to blame and the “government” is a handy scape goat. That all said I do not know if the market is correct in interpreting Friday’s report is less bearish than the numbers suggest. I do believe summer hog slaughter runs will provide confirming evidence one way or the other. NASS does provide historical track records. You can find them on livestock at http://bit.ly/1pWHbd4

  3. Joe Nicholas says:

    Hey John, any insight as to the discrepancy between near and distant hog futures (specifically the break b/w Aug/Oct?). Is the market discounting the potential impact of PED, or do they anticipate a cool summer w/ lots of cheap feed in the autumn for the fall futures contracts?

    • J. Otte says:

      Joe Theories yes. Insight maybe. The first reported PEDV cases surfaced April, May, June 2013. Fall and winter hog slaughter runs held up pretty well, hinting that death losses back in the spring may not have been as severe as some thought at the time.. Trade talk indicates severity of PEDV outbreak intensified as weather got colder in early winter. The surge in samples being tested in the vet network in November, December that were positive provides some confirming evidence. November December January pigs come to the slaughter market in May June July give or take a bit. The smallest hog slaughter week of the year is typically the week of the fourth of July. It is a short kill week during a seasonally low slaughter time of the year. Summer slaughter is typically the lowest seasonally because historically and continuing somewhat to this day, the winter pig crop is the smallest pig crop of the year. Now backing up a bit, pigs born in May June come to slaughter market in November December January. Death losses due to PEDV in May June 2013 shaved some slaughter hogs off what is normally the seasonally largest slaughter runs of the year in November December. That dampened winter hog price lift from spring PEDV losses. The reverse will be true for the pigs lost during November, December, January. Those pigs would have come to market at the seasonally low slaughter time of the year. Thus those PEDV losses make the already seasonally tight summer supply even tighter, therefore amplifying price lift. Expectations PEDV will sharply curtail summer slaughter supply drives the premium in summer futures. A bunch of factors contribute to the sharp discounts into the fall contracts. One is the expectation that PEDV outbreaks will ease soon as the weather warms, which result in more of the pigs that are born reaching slaughter weight in the fall. Another is slaughter hog supplies normally rise seasonally into the fall. Plus recent and current hog profits seem likely to be enticing producers to up production cyclically. We’ll get some insight into expansion plans in USDA’s Hogs and Pigs Report at the end of the month. Those numbers could well under estimate the amount of expansion that will occur. USDA surveyed producers around the first of March. Hog prices and pork prices have surged dramatically since USDA took the survey. Everything the market does it overdoes. Chatter is intensifying that hogs may have risen too high, too fast. A correction will eventually come. Expectations are USDA’s March 21 Cattle on Feed Report will show more cattle were on feed March 1, driven by earlier up ticks in placements. Summer beef supply could be a bit larger. It won’t be cheap. But retailer beef featuring may attract some grilling demand from pork chops. The surge in retail pork prices has yet to flow all the way through to the retail meat case. Price-sticker shock when it does may help trigger a correction in pork and hogs. J Otte

      • Northwest Iowa pig farmer says:

        A pig being born March 1st wouldn't even make the August market with August expiring on the August 14. I think the market is under estimating the impact on October. The biggest hole just might be August and October.

  4. J. Otte says:

    Estimating anybody's margin is an exercise fraught with peril. The packer has so many ways to slice and dice the carcass. Then there's the issue of spot meat sales, forward sales and deliveries on contracts. That same string of variables applies to live animal purchase methods resulting in variability. One might be better off using changes in estimated margins as an indicator of direction profitability is moving, rather than as a measure of profitability. J otte

  5. Anonymous says:

    Hope the poor packer is making money they been losing for 40 years

  6. Willie Vogt says:

    Dear reader, if you want to post a link in here please use a link shortener - we understand your need to share your favorite chart, but your links are not working here. I have removed those links because of the formatting issues. - Willie Vogt, Editorial Director.

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