Livestock Analysis | October 21, 2022
Price action: December lean hogs rose $2.10 to $89.125, the contract’s highest close since Aug. 15 and a weekly gain of $6.875.
5-day outlook: Futures may extend recent sharp gains behind bullish technicals and firming cash. Today’s CME lean hog index was $93.76 and the benchmark is expected to rise another 29 cents Monday. Pork cutout values fell $1.26 early today, but that followed Thursday’s $2.57 jump. Hog slaughter has now averaged 2.0% under year-ago levels over the past three weeks. Moreover, Iowa-Southern Minnesota hog weights averaged 282.8 pounds last week. While that marked a 0.7-pound weekly rise, it came up 4.3 pounds under the comparable 2021 reading and fell 1.6 pounds below the five-year average. The slaughter and weight totals point to comparatively tight supplies and suggest further upside price potential.
30-day outlook: Long-term averages imply hog market weakness from mid-October into December, but the usual early-fall rally (from around Labor Day into mid-October) didn’t start until last week, which suggests it could persist for a while. As discussed above, the relative hog shortage implies significant support under the market. Short-term demand prospects also seem promising, with consumer pork buying apparently holding up well in recessionary conditions. We suspect strong Mexican demand for hams, as well as the shortage of turkeys likely to be available for the coming holiday season, along with comparatively low ham stockpiles, all point to strong demand-side support for hogs as well.
90-day outlook: The shortage of hams and turkeys for the holiday season could support the hog/pork complex into mid-December, when grocers traditionally complete their ham buying for the holiday season. Thus, the usual late-year slide in hog and pork prices seems likely to be limited in size and length. We also view the early-2023 hog outlook as being quite promising, since hog supplies are expected to continue running about 1% below year-ago levels through the first half of the year. We also think domestic pork demand will continue exceeding general expectations for a slowdown amidst the anticipated recession. Moreover, China is experiencing strong retail pork price inflation due to an apparent shortage. Thus, they seem likely to accelerate their imports of U.S. pork, thereby boosting demand for U.S. hogs and pork and ultimately supporting prices once again.
What to do: Get current with advised soymeal 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 needs through mid-November covered in the cash market. You are hand-to-mouth on corn-for-feed needs.
Price action: December live cattle rose 75 cents to $152.425, a lifetime-high close for the contract, and gained $4.65 for the week. October live cattle gained 70 cents to $150.475, the highest close for a nearby contract since August 2015. November feeder cattle rose 80 cents to $178.35, up $3.575 for the week.
5-day outlook: Today’s technically bullish weekly high closes suggest followthrough chart-based buying early next week. Today’s monthly USDA Cattle on Feed Report showed the Oct. 1 feedlot inventory down 0.9% from the same date in 2021, with September placements down 3.8% and marketings up 4.0%. With all three categories in-line with the pre-report estimates, the data is largely neutral and will have little impact on prices. However, declining feedlot inventories paint a bullish picture for both cattle futures and the cash cattle market into 2023.
Recent improved cash market fundamentals should also support higher cattle futures prices next week. Cash cattle prices are poised to reach the highest levels in seven years. Feedlots obtained $148 in the southern Plains and $152 in the northern market Thursday. Through Thursday morning, USDA-reported live steers averaged $149.89, up from last week's average of $146.99. The noon beef report today showed Choice beef cutout values rose 11 cents to $253.73, the highest in five weeks. Select grade rose $3.51 to $225.59. The Choice-Select spread narrowed to $28.14. Movement at midday was 49 loads.
30-day outlook: The cattle markets should remain elevated in the coming weeks amid still-tight supplies of market-ready animals in feedlots. The wide Choice-Select grade spread suggests well-finished cattle supplies are tight. Beef packer margins have dipped in recent weeks and may move into the red. However, such is not likely deterrent to continued increases in fed cattle prices, since the tightness of available supplies will likely force packers to compete for the limited numbers.
90-day outlook: While the U.S. stock market has been volatile amid elevated concerns over the potential for recession, history suggests consumer demand for beef will not be crimped to a substantial degree. When consumer budgets get tighter they tend to eat out less and dine at home, but in doing so prefer the tastier beef cuts.
What to do: Get current with advised soymeal 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 needs through mid-November covered in the cash market. You are hand-to-mouth on corn-for-feed needs.
