Livestock Analysis | January 27, 2023
Hogs
Price action: Nearby February hog futures fell $1.15 to end the week at $75.875. That represents a weekly decline of $1.95.
5-day outlook: The cash hog market has seemingly found a bottom, with the lean hog index dipping to $72.13 on Monday, then edging higher three days to bring Thursday’s preliminary figure up to $72.64. We expect sustained seasonal gains through at least mid-February. However, traders clearly doubt there’s much short-term upside potential, as indicated by today’s sizeable drop suffered by the nearby February contract. That left it about $3.50 over the index, with expiration looming on Feb. 14. This week’s slaughter topped expectations at 2.536 million head, up 6,000 head (0.2%) from year-ago, whereas the USDA projected hog supplies would average 2% under 2022 levels through the first half of the year. It appears the industry is working its way through the backlog created by extended packing industry cutbacks during the holiday season, but traders may need to see sustained reductions before adopting more optimistic attitudes toward the price outlook.
30-day outlook: It’s rather common for the hog and pork complex to suffer sideways-to-lower price action in late winter and early spring, but the weakness suffered to start the year seems likely to reduce the chances of that happening, especially if grocers take the opportunity to boost their pork purchases and pass some of the savings on to consumers. Much depends upon whether hog supplies fall to levels comparable to forecasts based upon USDA data. The strong possibility that fed cattle prices will surge above $160.00, with beef prices rising commensurately, also seems to favor strong substitution demand for pork.
90-day outlook: History shows that consumer demand for red meat generally holds up well during recessionary times. That hasn’t seemed to be the case so far this winter, but the equity markets are behaving well, thereby suggesting economic conditions will improve this spring. Meanwhile, hog and pork supplies are likely to be limited. Even if forthcoming hog slaughter matches year-ago levels, these would still be well below the highs seen in 2019-20. The summer hog contracts imply a comparatively normal rally to a July high around $104.50. But given the fact that the hog index peaked around $122.00 the past two years, we believe the spring advance will prove larger than implied by hog futures. We expect elevated fed cattle and beef prices to favor a larger move as well. Again, the size of forthcoming hog supplies will be key.
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 all corn-for-feed and soymeal needs covered in the cash market through February.
Cattle
Price action: Nearby February live cattle ended Friday unchanged at $156.725; that marked a weekly rise of 10 cents. With the January future expiring at $179.575 Thursday, nearby March feeder futures advanced 62.5 cents to $183.475, which represented a $2.50 weekly advance.
5-day outlook: Beef packers proved able to force cash prices lower again this week, with the Monday-Thursday average for the five direct-market areas falling $1.23 to $153.84. The industry is seemingly still working its way through the backlog of feedlot cattle created by the extended holiday season and the cutbacks undertaken by packers at that time. This week’s preliminary cattle slaughter total reached 659,000 head, up 4,000 or 0.6% from the comparable year-ago figure, despite the feedlot population running about 3% under last year. Packers may be persuading producers to take less by pointing to sustained wholesale weakness; choice cutout has recently been stuck around $270.00, whereas it started the year around $285.00. But producers seem likely to “bow up” in the near future and demand higher prices. We cash and futures will rise next week.
30-day outlook: Although beef prices regularly prove rather weak during February, we don’t expect much downside in the weeks just ahead for several reasons. First, retail beef prices have recently remained below comparable year-ago levels, which should prompt stronger consumer demand if the equity indexes are correct in projecting improved economic conditions. Second, cattle supplies in the form of the feedlot population and beef production per head are down, which implies little price give to the downside. Third, cattle slaughter typically falls to its lowest levels of the year, aside from holiday weeks, in late February and March. Fourth, after having taken lower packer bids over the past month, producers are likely to demand higher prices as the spring grilling season looms.
90-day outlook: Steer dressed weights, which are a strong indicator of the currentness of feedlot marketings (i.e., the supply of market-ready fed cattle) fell to 914 pounds per head during the week ended Jan. 14. That represented an 8-pound year-to-year decline. Moreover, steer weights surged to 830 pounds in early-February 2022, but we expect weights to continue sliding in the weeks just ahead, with the potential for an exaggerated drop to the usual May low. History shows years in which marketings remain current, as signified by reduced steer weights, are routinely marked by stronger late-winter and early-spring price advances. We see little reason to think that won’t happen again this year.
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 all corn-for-feed and soymeal needs covered in the cash market through February.
