Livestock Analysis | July 22, 2022

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Hogs

Price action: August lean hogs jumped $2.40 to $118.70, up a sharp $8.875 for the week and the contract’s highest closing price since April 19.

5-day outlook: Cash hog and wholesale pork fundamentals powered hog futures higher this week. The CME lean hog index rose 67 cents today to a 13-month high at $117.04 (as of July 20) and is expected to hit $118.16 on Monday. The August contract closed today with a premium of $1.66 over the cash index, underscoring traders’ apparent outlook for further strength. Pork cutout values rose $3.02 early today to $126.92, near a one-year high. Given the hog market’s historical tendency for cash weakness from mid-July into mid-August, today’s strong futures close might be seen as overdone. USDA’s Cold Storage report today could weigh on futures Monday, since it indicated U.S. pork stockpiles had declined just over 5.0 million pounds during June, while the average drop over the past 10 years was 36.0 million.  

30-day outlook: Despite the negative demand implications of the Cold Storage report, recent developments seemingly indicate the usual tight summer supplies of U.S. hogs and pork are meeting unusually strong demand at this juncture. We suspect consumers have already reverted to a recessionary buying pattern of visiting restaurants less often and buying meat more aggressively at the grocery store. This could continue providing support for prices into early August, but the traditional increase in second half hog supplies will almost surely arrive by mid-August at the latest. That potential may limit gains by the nearby August contract in the short run and might cause a significant downturn by its August 12 expiration. Surging mid-August supplies could drag cash and futures sharply lower later in the month. Much depends upon the persistence of the apparent demand surge.  

90-day outlook: The seasonal chart pattern of hog prices shows a typical drop from June-July highs into early September, post a modest comeback, then move steadily lower into late fall and/or early winter. The belated nature of the current surge may also presage a belated decline into early autumn. The other big question facing the industry is the likely size of the seasonal decline through the second half of the year. If the seeming improvement in pork demand persists, that could significantly reduce the fall breakdown. We are inclined to agree  with that view, but must warn that the hog market can sometimes prove weak during the autumn months.

What to do: Be prepared to extend feed coverage when market bottoms are in place. 

Hedgers: Carry all risk in the cash market for now.

Feed needs: You are hand-to-mouth on corn-for-feed and soybean meal needs.

 

Cattle

Price action: August live cattle rose $1.65 to $137.375, the contract’s highest closing price since June 8 and a gain of $2.725 for the week. August feeder cattle rose $3.275 to $181.55, a five-month closing high and up $5.20 for the week.

5-day outlook: Technically bullish weekly high closes in August live and feeder cattle suggest follow-through buying interest early next week. The near-term chart postures in both markets improved markedly with today’s big price gains. Today’s Cattle on Feed report could weigh on Monday’s live cattle opening since June feedlot placements at 1.629 million head (98% of year-ago) modestly exceeded the forecast average at 95%. However, having June marketings match pre-report forecasts at 102% of last year and the July 1 Cattle-on-Feed population at 11.34 million head exceed the predicted figure at 11.30 million seem likely to limit the report’s price impact.

USDA’s Cold Storage report today showed U.S. beef stockpiles declined about 10.0 million pounds during June, ending at 516.2 million on June 30. The decline essentially matched the 10-year average for June, so the Cold Storage result is unlikely to affect cattle futures next week. Choice beef cutout value at noon today rose 45 cents at $268.21. Select grade gained $1.91. Movement at midday was 53 loads.

30-day outlook: The very current feedlot conditions and the tendency of beef production to decline in August should continue to support the cattle futures and cash markets in the coming weeks. The spread between Choice and Select grades of beef was $25.77 early today, which emphasizes the relative shortage of well-finished cattle entering the marketing chain. 

90-day outlook: The U.S. stock indexes have been trending up since mid-June, which provides an early clue the indexes have bottomed out. If the stock market continues to trend up consumers will be less inclined to tighten their belts for fear of impending recession. That would imply continued good demand for red meat, especially the pricier beef. The U.S. dollar index has also backed down from its 20-year high scored last week and if it has put in a major top, U.S. beef exports would benefit.

What to do: Be prepared to extend feed coverage when market bottoms are in place.  

Hedgers: Carry all risk in the cash market for now.

Feed needs: You are hand-to-mouth on corn-for-feed and soybean meal needs.

 

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