Livestock Analysis | November 18, 2022
Price action: December lean hog futures fell 75 cents to $84.225, down 12.5 cents for the week and the lowest close since Nov. 4.
5-day outlook: Anticipation of sustained cash weakness seemed to continue weighing on hog futures. That was made most evident by the $1.00-plus drop posted by the February contract Friday. There is certainly some justification for such sentiment, since the CME Lean Hog Index continued its slide, with the official Wednesday quote dipping 8 cents to $88.14 today. Thursday’s preliminary figure slid another 37 cents to $87.77. Thus, the December future projects the cash market will decline another $3.50 or so by the time it expires on Dec. 14. Such a decline is normal for this time of year, due in part to the strong history of hog slaughter hitting its annual high in the last full work week prior to the Christmas holiday. We harbor some suspicions this year will be different, since average hog market weights have fallen about 6.5 pounds below comparable year-ago levels, thereby implying relatively tight market-ready supplies. That resulted in last week’s kill falling almost 5% under year-ago levels, although this week’s total, at 2.605 million head, dropped just 1% annually.
30-day outlook: History suggests the combination of seasonally weak demand for most pork cuts other than hams, as well as slaughter totals approaching annual highs, will exert continued pressure upon hog values. Again, we are inclined to think comparatively strong demand for pork in general, as well as the shortage of turkeys and hams, will tend to limit price losses. The reduction in hog supplies discussed above should prove supportive as well. Conversely, the market could prove vulnerable to significant short-term losses when grocers complete their ham buying for Christmas dinner entrees in mid-December. The industry will also focus closely upon the USDA’s quarterly Hogs & Pigs report set for release on December 23, which will clarify the likely hog supply situation for 2023.
90-day outlook: Although it’s quite common for cash hog prices to reach annual lows between Christmas and New Year’s, the market also exhibits a strong tendency to rally into mid-February. The big reductions in hog weights seen lately suggest the rally could be exaggerated this year. That was the case in the only two previous years when hog weights fell sharply in the fourth quarter. If the previous USDA Hogs & Pigs reports were accurate, hog supplies are likely to fall about 1% below year-ago levels through the first half of 2023. We believe those numbers will be met by firm domestic demand as consumers shift their meat buying from restaurants to grocery stores during recessionary times. Moreover, soaring retail pork prices in China are expected to spur strong buying of U.S. pork from that country during the weeks and months ahead.
What to do: Get current with advised feed coverage. Be prepared to extend coverage on additional price pressure.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You have 100% of soybean meal and corn-for-feed needs covered in the cash market through November.
Price action: December live cattle rose 32.5 cents to $153.075, up $1.55 for the week. February live cattle rose 45 cents to $155.85, up $2.60 for the week and a three-week high. January feeder cattle rose 80 cents to $180.775, up $1.20 for the week.
5-day outlook: Today’s technically bullish weekly high closes in live cattle and feeder cattle may lead to followthrough buying Monday. Today’s USDA Cattle on Feed report may encourage further buying, as the agency reported feedlot placement in October fell 6.1% from the same month a year ago, larger than the 3.5% decline analysts expected. USDA estimated the U.S. feedlot inventory as of Nov. 1 at 11.706 million head, down 2.0% from the comparable year-ago level and larger than the 1.7% drop analysts expected on average. Continued cash strength may support futures next week. Cash cattle traded in around $151 to $152 in the southern Plains Thursday, up $1 to $2 from last week. Next week is a Thanksgiving-holiday-shortened trading week, which may have beef packers backing off on cash bids due to the lighter holiday slaughter schedule.
30-day outlook: Cattle weights are rising seasonally and weekly slaughter totals remain near annual highs. Still, cash cattle prices posted gains this week. Such continues to reflect an overall tight fed cattle supply and better consumer beef demand. These elements are likely to keep the cattle futures, cash cattle and beef markets elevated in the coming weeks. On the U.S. beef export front, the recent solid drop in the U.S. dollar index hints the index has put in a major top. That would be good news for the cattle industry as U.S. beef would become more price-competitive on the world markets.
90-day outlook: Interest rates and the U.S. economy will be key to cattle market direction into 2023. Lower than expected U.S. inflation reports in recent weeks have led to ideas U.S. inflation has peaked and that a “soft landing” for the U.S. economy can be engineered by the Federal Reserve. However, late this week two Fed officials warned the inflation fight is not over and that the central bank will remain aggressive in its fight to stamp out inflation—even if it means a significant slowing in the U.S. economy. How the U.S. economy fares in the coming months will have an impact on consumer demand for beef. A soft landing for the economy would suggest continued good demand. Even a mild U.S. economic recession is not likely to have a seriously deleterious impact on U.S. consumer beef demand. More worrisome for the cattle/beef markets would be the dreaded stagnation scenario, whereby the economy significantly slows while inflation remains high.
What to do: Get current with advised feed coverage. Be prepared to extend coverage on additional price pressure.
Hedgers: Carry all risk in the cash market for now.
Feed needs: You have 100% of soybean meal and corn-for-feed needs covered in the cash market through November.
