Livestock Analysis | March 25, 2022
Price action: Surging pork prices sent hog futures sharply higher to end the week. June lean hogs soared $3.775 to a fresh high at $125.85, while April spiked $4.70 to $107.475, up $8.075 for the week.
5-day outlook: After fluctuating a few dollars higher and lower lately, wholesale pork cutout leapt $8.31 to $116.32 at midday. One big difference was various primal cuts all posted significant gains, with pork belly values rocketing over $30.00. The market will likely give back at least a portion of those early gains, but the across-the-board advance suggests grocers all jumped in with early purchases for the spring grilling season today. The CME Lean Hog Index also rose 29 cents to $101.50 for Wednesday, with Thursday’s preliminary figure rising another 75 cents to $102.25, the highest in over six months.
Bullish traders may also be anticipating a bullish USDA Hogs & Pigs report March 30. USDA analysts estimated the fall 2021 pig crop had fallen 4% from year-earlier, which implies a similar reduction in March-May hog supplies. Recent slaughter totals have seemingly confirmed that decline through early March. Traders will also be looking at the winter pig crop as an indicator of summer hog supplies. Those are expected to decline less substantially from last summer. If today’s early wholesale gains prove a harbinger of forthcoming seasonal strength, hog futures could continue surging.
30-day outlook: Grocers are likely to feature hams during the run-up to Easter, then shift toward grilling cuts. That may presage April ham weakness, but gains in loins, ribs and bellies could power substantial cash and wholesale market gains anyway. Of course, much depends upon the results of the Hogs & Pigs report. Another key to the outlook arises from consumer demand. That has seemingly been stifled by greatly elevated grocery prices. Many in the industry seem to expect much more of the same. Signs that that is not the case could spur even stronger gains in cash and futures prices through early spring.
90-day outlook: Look for the usual spring combination of seasonally rising consumer demand and hog slaughter totals declining to annual lows in early summer to power a dramatic cash hog rally over the next 90 days. The industry is not especially confident about comparative demand strength, whereas the March 30 Hogs & Pigs report should clarify the short-term supply situation. Persistently strong retail beef prices seem likely to boost substitution demand for pork, whereas inflation might also force many consumers to shift all the way down to chicken. We expect red meat demand will follow its historical pattern of holding up surprisingly well if a recession materializes, but the livestock markets could come under pressure from psychologically driven selling amidst poor economic news.
What to do: You are hand-to-mouth on corn-for-feed and soybean meal needs. Wait on an overdue corrective pullback to extend coverage.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You remain hand-to-mouth on soybean meal and corn-for-feed needs.
Cattle
Price action: April live cattle led its nearby counterparts modestly higher, climbing 80 cents to $140.475, while June cattle added 42.5 cents to close at $137.375, up 30 cents for the week. May feeder futures fell $1.175 to $165.325, down $2.125 for the week.
5-day outlook: Live cattle futures may start next week under pressure in the wake of today’s USDA Cattle on Feed report. The March 1 U.S. feedlot population was pegged at 12.163 million head, up 1.4% annually and topping expectations for a 1.1% increase. February placements were expected to climb 6.1%, but the actual figure came in 9% higher. February marketings rose 5%, also exceeding expectations for an increase of 4.2%. The placement figure looks generally bearish for fed cattle futures, while the large marketings may provide some support for the expiring April contract.
Although choice beef quotes broke a solid string of daily gains with a 32-cent dip to $262.09 at noon Friday, that probably represented late-month weakness rather than a change in the upward spring trend. That tendency, along with USDA cash market reports indicating cash cattle prices probably rose slightly this week (up 41 cents to $138.96 for the five-area average through Thursday), seemed to power Friday’s modest front-end futures gains. This looks supportive of next week’s cash outlook as well.
30-day outlook: The increased feedlot population and general lack of currentness in feedlot marketings may limit the traditional seasonal cash market advance during April. While packer margins remain profitable, they are far below the record-smashing levels seen last spring. Yet, cash cattle prices are significantly higher than they were during spring 2021. Given the elevated cost of beef in grocery stores, these factors all seem to point to limited upside price potential over the next few weeks. Indeed, this may signal a relatively early seasonal downturn in cash cattle quotes next month.
90-day outlook: Cattle slaughter typically increases from late-winter lows toward early-to-mid-summer highs, which is the main driver of the cash market’s historical tendency to turn lower by late April or early May and remain weak into summer. Current circumstances offer little indication the market will avoid that fate again this year. Indeed, large premiums in the fall-winter contracts seem likely to foster a laissez-faire attitude among feedlot operators as they market their cattle this spring and summer, thereby potentially causing a slowly building backlog of overfed cattle in feedyards. This phenomenon has sometimes caused large futures premiums to become self-defeating prophecies in the past. We remain cautiously optimistic that an economic recession won’t exacerbate recent weakness in retail beef demand, but high grocery store prices still seem likely to limit the market’s upside potential in the coming weeks and months.
What to do: You are hand-to-mouth on corn-for-feed and soybean meal needs. Wait on an overdue corrective pullback to extend coverage.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You remain hand-to-mouth on soybean meal and corn-for-feed needs.
