Hog Futures 'Undervalued' Compared to Cattle

Posted on 03/24/2017 8:29 AM

Recent developments in the livestock markets have been quite remarkable, but those have done more to muddy rather than clarify the mid-2017 price outlook.

Cash cattle prices plunged from around $172 in November 2014 to the $98 area last fall. The subsequent rebound has also proven very impressive, with the rise to last week’s quotes around $133 marking the largest seasonal rally of the past 20 years.

History suggests spot quotes will peak in the next few weeks, then suffer a substantial seasonal setback, which explains the huge discounts built into summer live cattle futures. Conversely, those discounts will also encourage cattlemen to continue marketing their cattle very aggressively, potentially limiting market-ready supplies and supporting prices surprisingly well.

Meanwhile, after cash hog prices vaulted 64% from the fall low to the $77.73 February high, hog futures are trading weakly, especially relative to cattle. The April contract implies seasonal weakness, but having the summer contracts recently trade below the winter high indicates extreme industry pessimism. Summer prices have failed to top the February peak just three times since 1980.

Given the huge gains posted by the cattle market, the hog bearishness is truly extraordinary. It reflects industry concerns about a major supply surge this spring. But recent events suggest greatly elevated beef prices will make pork look cheap and spur demand for the various grilling cuts. Ultimately, we suspect cash cattle and hog prices will exceed industry expectations during the spring and summer.

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